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The Liquidation of War Production 
By A. D. H. Kaplan 

Demobilization of Wartime Economic Controls 
By John Maurice Clark 

Providing for Unemployed Workers in the 


By Richard A. Lester 

Jobs and Markets 
By C.E.D. Research Staff 

Financing Business during the Transition 
By Charles C. Abbott 

Production, Jobs and Taxes 
By Harold M. Groves 

Agriculture in an Unstable Economy 
By Theodore W. Schultz 

International Trade and Domestic Employment 
By Calvin B. Hoover 

Postwar Taxation and Economic Progress 

By Harold M. Groves 

Controlling World Trade 

By Edward S. Mason 


Personnel Problems of the Postwar 

Transition Period* 

By Charles A. Myers 

The Economics of a Free Society* 
By William Benton 

World Politics Faces Economics 
By Harold D. Lasswell 
* Published by C.E.D. 




Cartels and Commodity Agreements 



Professor of Economics 
Harvard University 

First Edition 



controlling world trade 

copyright, 1946, by the 
Committee for Economic Development 


All rights reserved. Permission to 

reproduce material from this book 

may be secured by writing the 



The Trustees of the Committee for Economic 
Development established the Research and Policy 
Committee "to initiate studies into the principles of 
business policy and of public policy which will foster 
the full contribution by industry and commerce in the 
postwar period to the attainment of high and secure 
standards of living for people in all walks of life 
through maximum employment and high produc- 
tivity in the domestic economy." (From C.E.D. 

The studies are assigned by the Research Director 
to" qualified scholars, drawn largely from leading 
universities. Under the by-laws "all research is to be 
thoroughly objective in character, and the approach 
in each instance is to be from the standpoint of the 
general welfare and not from that of any special 
political or economic group." 

The reports present the findings of the authors, 
who have complete freedom to express their own con- 
clusions. They do not purport to set forth the views of 
the Trustees, the Research and Policy Committee, the 
Research Advisory Board, the Research Staff, or the 
business men affiliated with the C.E.D. This report on 
future international trade controls and, in particular, 
on the place of cartels and commodity agreements, 
is the thirteenth in the series. 

The Research and Policy Committee draws on these 
studies and other available information in formulating 
its recommendations as to national policy for the 
problems examined. Its policy statements are offered 
as an aid to clearer understanding of steps to be 
taken to reach and maintain a high level of pro- 
ductive employment and a steadily rising standard 
of living. The statements are available from the 
national C.E.D. headquarters. 


IN THE postwar world, what are to be the roles of private 
cartels and their official counterparts, intergovernmental 
commodity agreements? Our answers to these questions will 
be important for our prosperity and peace. But, save for a 
handful of specialists, we do not have the information on which 
to base our answers. This book is therefore most timely. It 
is written by a scholar with a rich background of study and 
firsthand experience in international affairs. Aware of the 
need to go forward in international cooperation, but aware 
also of the hurdles, the author indicates what seems feasible 
now as well as what is ultimately desirable. 

While this book is concerned specifically with commodity 
controls, other publications of the Committee for Economic 
Development deal with the broader problems of international 
economic relations. These include International Trade and 
Domestic Employment, a research staff report by Calvin B. 
Hoover; World Politics Faces Economics, a supplementary paper 
on Russian- American relations by Harold D. Lass well; and 
International Trade, Foreign Investment and Domestic Employment, 
including Bretton Woods Proposals, a policy statement by the 
Research and Policy Committee. 

The CED research program, of which the study of inter- 
national economic relations is a part, is described on pages 

Theodore O. Yntema 
Research Director 



A LTHOUGH this rcport is presented in two parts, one con- 
l\ cerned with private business agreements (cartels) and 
the other with intergovernmental commodity agreements, the 
distinction between them can easily be overemphasized. 
Cartel arrangements permit of varying kinds and degrees of 
governmental participation and tend to shade, as in the case 
of tin and rubber, into commodity agreements. Both operate 
largely through export quotas with or without attendant con- 
trols of price, production, and stocks. Both tend to restrict 
the total volume of international trade and a free choice by 
producers and dealers of the trade channels through which 
they buy and sell. Commodity agreements, of course, permit 
of an upward as well as a downward adjustment of exports and 
production but so also do cartels — and usually within a ceiling 
that is demonstrably lower than would be attained in the 
absence of control. The fact that commodity agreements 
are negotiated by governments is no guarantee that the 
interests involved are very different from those concerned with 
cartel formation. Intergovernmental agreements permit of 
import-country representation, and it is along these lines that 
changes in international commodity controls, away from an 
exclusive concern with producer interests, are to be expected. 
In many prewar commodity agreements, however, producer 
interests were as much to the fore as in the typical cartel. 

The distinction has been more sharply drawn in the United 
States than elsewhere primarily because (1) our peacetime 
commercial policy has been concerned almost exclusively with 
tariff questions, (2) the separation between business and gov- 
ernment is relatively sharp, and (3) our participation in 
commodity agreements has been limited to agricultural com- 

• ix • 


modities, the control of which must of necessity be strictly 

However, in almost any European country, commercial 
policy includes a wide repertoire of devices for protecting the 
domestic market, assuring the country's exchange position, 
and advancing her economic interests and the interests of her 
nationals abroad. Furthermore, in pursuing these objectives, 
government and business cooperate much more closely than 
is customary here. Both cartels and commodity agreements 
tend to be viewed as instrumentalities of commercial policy, 
and, in both, business representatives and government 
officials may participate. Although there is a wide variation, 
even in foreign experience, between a purely private cartel 
arrangement in, say, a patented product, and purely govern- 
mental controls for many agricultural products, the dividing 
line is not so sharp abroad, and the behavior of cartels has 
not been conspicuously different from that of commodity 

This divergence between American and other experience 
with cartels and commodity agreements must be borne in 
mind in the ensuing discussion. There is a school of thought 
in the United States that abhors cartels as private treaties 
restrictive of trade but embraces commodity agreements as 
intergovernmental arrangements inevitably serving the public 
interest. Cartels may, and usually do,' restrict trade but so do 
commodity agreements — and much more effectively. Nor 
is the range of interests served necessarily very different. 

The general line of policy defended in this report is that, 
when international controls relating to a commodity or industry 
are demonstrably necessary, they should be intergovern- 
mental in character. It does not follow that intergovern- 
mental commodity agreements should be numerous or easily 
justifiable on grounds of public interest. If the agreement, 
moreover, lies outside the field of agriculture, it is likely to 
involve a type of governmental relation to industry with 
which the United States has as yet had little experience. 


The treatment of international private and public agree- 
ments in Parts I and II of this report is not quite symmetrical. 
TJie discussion of cartels is meant to apply to private agree- 
ments in both raw materials and manufactured products. 
Part II on commodity agreements, however, treats these as 
an aspect of public policy toward raw material problems. 
No manufacturing industry has as yet been subject to regula- 
tion by intergovernmental agreement — though, if cartels 
were to be outlawed, a case might be made, under certain 
circumstances, for such regulation. 

It will probably also be noted that the recommendations in 
the cartel part of this report are made with greater firmness 
than the recommendations on commodity agreements. This 
reflects a lack of sureness that the author has not been able to 
overcome with respect to his conclusions on intergovernmental 
controls. The underlying difficulty has to do with the degree 
to which public policy in this field can be expected to become 
anything more than a reflection of the activities of interested 
pressure groups. If he could join those who regard govern- 
ment as the impartial arbiter of the public interest, the author's 
enthusiasm for intergovernmental commodity agreements 
might be more than lukewarm. On the other hand, if he 
could sympathize with those who see government as acting 
solely in the interests of organized producers, he would gladly 
join in denouncing commodity agreements as nothing but an 
insidious form of cartel. 

Edward S. Mason. 

Cambridge, Mass., 
June, 1946. 



THIS Study has received the benefit of suggestion and criti- 
cism from many sources. To Washington colleagues who 
participated in the work of the Interdepartmental Committee 
on Cartels and Private Monopolies the author's debt will be 
obvious. The Food Research Institute of Stanford University 
has put under obligation everyone who writes, or will write, 
on the subject of intergovernmental commodity arrangements. 
The author recognizes a special debt to the director of the 
Institute, Joseph S. Davis. 




Foreword vii 

Preface ix 

Acknowledgments xiii 



Summary of Recommendations 3 


I. International Business Agreements: Statement of the Problem 11 

A. Increase in the Number and Importance of International Cartel 

Agreements, 1920-1940 11 

B. The Participation of Governments in International Business 

Agreements 14 

C. The Stage of Processing in Relation to Government Participa- 

tion in International Control Schemes 16 

D. Cartels as Trade Barriers 18 

E. The Monopoly Effects of Cartels and Combines 20 

F. International Aspects of Monopoly 24 

G. The Relative Importance of the Cartel Problem and Cartel 

Policy 26 

A Note on the Meaning and Recent Usage of the Term "Cartel" 29 

II. Cartel Policy by International Agreement 32 

A. The Proper Scope of Intergovernmental Regulation of Manu- 

factured Products 32 

B. The Problem of War-induced Excess Manufacturing Capacity 33 

C. Cartel Regulation 39 

D. Proposed International Agreement on the Curbing of Cartels 44 

Business Agreements Included, and International Action 

Recommended 46 

International Patents and Processes Agreements .... 49 

International Combines 55 

International Machinery. 59 

E. State Department Proposals Concerning Restrictive Business 

Practices 61 

U.S. Department of State Proposals: Restrictive Business 

Practices 64 

III. American Policy toward Business Agreements in Foreign Trade 66 

A. The Alternatives to International Action 66 

B. American Export Associations 68 

. XV . 


Chapteb Page 

C. American Participation in Foreign Cartel Arrangements , . 75 

D. The Limitation of Domestic Competition by International 

Business Agreement 80 

E. Advance Clearance of Proposed International Business Agree- 

ments 85 

F. Patents and Processes Agreements 88 

G. Summary 93 

IV. Cartels and American Security 96 

A. Cartels and American Preparedness for War 97 

Effect of Patent Exchanges on American War Production , . 101 

The Carboloy Case 102 

The Magnesium Case 105 

Congressional Investigations 110 

Limitation of Use of Acquired Technology 110 

Division of Export Territory 112 

Protection of Enemy Interests 115 

Espionage 116 

"Germany's Master Plan" 120 

B. Cartels and Military Aggression 122 

International Cartels as a Medium of Aggression 124 

Domestic Cartels in Germany as a Source of Military Aggres- 
sion 128 



Summary of Findings and Recommendations 135 

International Commodity Consultation 1 38 

Disposition of Synthetic Capacity 1 38 

Expansion of Consumption versus Restriction of Produc- 
tion 139 

Conservation by Commodity Agreement 140 

Worker-owner Industries versus Large-scale Production 141 

Quota Schemes 143 

Buffer Stocks 145 

International Commodity Organization 147 

V. Origins and Aims of Commodity Agreements 149 

A. Conditions Favorable to Commodity Agreements 150 

B. The Antecedents of Commodity Agreements 152 

C. Objectives of Intergovernmental Commodity Controls . . . 153 

Health and Morals 154 

Security Objectives 154 

Conservation 160 

Price Stabilization 163 

Surplus Stocks and Chronic Overproduction 169 

. xvi . 



Chaptek Page 

VI. Postwar Outlook for Particular Raw Materials 173 

A. General Considerations 173 

B. Foodstuffs 175 

Wheat, Sugar, Rice, Fats and Oils, Coffee, Tea and Cocoa 

C. Industrial Raw Materials Produced by Agriculture 183 

Cotton, Wool and Rubber 

D. Mineral Raw Materials 188 

Copper, Tin, Nitrates, Aluminum and Magnesium, Lead 
and Zinc 

E. On the Meaning of "Surplus " 195 

VII. International Commodity Consultation, Buffer Stocks and 

Quota Schemes 199 

Competitive Adjustment versus Planned Expansion 199 

A. The International Study Group 203 

Cotton, Rubber and Petroleum 203 

The Case of Nitrates 209 

B. The Role of Buffer Stocks 212 

C. Quota Schemes 224 

Can Quota Schemes Work? 225 

Are Quota Schemes Desirable? 231 

VIII. American Raw Material Interests and Commodity Policy . . 241 

A. The Growing Importance of Commodity Problems and Policy 241 

B. The American Trade Interest in Commodity Agreements , . 243 

C. American Agricultural Policy and Commodity Agreements . . 247 

D. The Proper Scope and Character of Commodity Agreements 252 

E. The Relation of International Economic Organization to 

Commodity Control 262 

U.S. Department of State Proposals: Intergovernmental Com- 
modity Arrangements 266 

A Note on the Committee for Economic Development and Its 
Research Program , 270 

Excerpts from By-laws . 278 

Index 283 



International Business Cartels 



POLICY concerning international business agreements is and 
must be a small segment of a broader policy concerning • 
international economic relations. The prospects within this 
broader area in turn depend primarily upon the kind of peace 
and security settlement that is possible after the war and upon 
the success of the principal industrial countries of the world in 
maintaining domestic employment. 

In order to deal with cartel policy, it has been necessary, 
therefore, to start with certain assumptions. Specifically, it 
has been assumed, first, that the peace will have substance and 
that international economic relations will not be dominated 
by preparations for the next war; second, that a considerable 
measure of success will attend the attempts of the United 
States and other industrial countries to maintain high levels 
of employment; and, third, that the kind of international 
economic policy outlined in the CED statement on inter- 
national trade will prove in large part acceptable to the 
principal trading nations of the world. ^ If these assumptions 
are not borne out, it is possible that our foreign economic 
policy, including cartel policy, will have to be developed along 
quite diff'erent lines from those here proposed. 

The aspects of international business agreements that raise 
questions of public policy are chiefly those involving restric- 
tions on the flow of goods in foreign trade. Such restrictions 
are alleged to have hampered our war preparation, but their 
most important effect by far has been to reduce the peacetime 
advantages of foreign trade. In any case, security interests 
present few problems that cannot be handled by a policy 
toward international business agreements adapted to our 
normal commercial interests. 

1 The Research Committee of the Committee for Economic Development, 

International Trade, Foreign Investment and Domestic Employment^ May, 1945. 

• 3 • 

Controlling World Trade 


It is possible to approach such a poHcy through cooperation 
with other governments and through unilateral action. Cer- 
tain of our interests, such as the avoidance of high cartel 
prices on imported commodities not produced in the United 
States, can hardly be achieved without intergovernmental 
cooperation. The achievement of other interests would be 
very much facilitated by such cooperation. 

Cartel policy by international agreement might take the 
form of either regulating or curbing restrictive business agree- 
ments in foreign trade. The main arguments for regulation 
are that international control of a commodity in foreign trade 
is sometimes necessary, and that, in the absence of common 
action, practices more restrictive of international trade than 
those inherent in the control scheme are likely to be adopted. 
The conditions under which international commodity controls 
appear to be desirable are discussed in Part II; it is there 
argued that intergovernmental agreement, rather than pri- 
vate business agreement under loose government super- 
vision, is to be favored. Calling cartels commodity agree- 
ments does not, however, solve our problem; if the controls 
imposed are to bear a reasonable relation to the economic re- 
quirements of the situation, very strict conditions for their 
administration will have to be observed. 

On the assumption that this can and will be done, a policy 
of curbing cartels by international agreement is recommended.^ 
The United States should propose an international convention 
w^hereby the signatory powers would agree: 

1. To prevent, by whatever means are appropriate to the 
laws and institutions of the several countries, the participation 
of their nationals in international business agreements that fix 
prices, limit output or exports, allocate markets or otherwise 
restrain the flow of goods in international trade. This con- 
vention would not apply to the organization of the exporters 

1 The relation of this recommendation to the cartel proposals published by the 
government of the United States following the Anglo-American financial and 
commercial policy discussions is considered in Chap. II. 

Summary of Recommendations 

or importers of a single country in export or import associa- 

2. To require the registration by their nationals of the terms 
of their participation in international business agreements of 
an enduring character and of such information on ownership 
of foreign assets or foreign affiliate relationships as may be re- 
quested by an International Business Office to be established. 

3. To establish, as an adjunct of an International Com- 
mercial Policy Organization, an International Business Office 
to study, on the basis of information supplied by the partici- 
pating governments, business practices that tend to restrict 
international trade and to recommend remedial action to the 
signatory states. 

4. To exchange on a nonrestrictive basis industrial tech- 
niques developed in government-supported research in- 
stitutions, and patents and processes acquired, as a condition 
of the peace settlement, from enemy countries. 

If such a convention were accepted, the United States would 
be required to implement by legislation the registration pro- 
visions as well as provisions for creation of an International 
Business Office and for intergovernmental exchange of in- 
dustrial techniques. The present antitrust laws are pre- 
sumably adequate to implement the first provision. 

Whatever measure of success may attend the proposal of an 
international convention for the curbing of cartel practices, no 
change is recommended for the present in our own antitrust 
laws. Although their application to American participation in 
various kinds of foreign-trade agreements is uncertain, pending 
current and prospective adjudication, such uncertainty is not 
likely to be removed by "clarifying" legislation. However, in 
applying antitrust laws to agreements in foreign trade, not 
only the enforcement agencies but the courts should take ac- 
count of the kind of world trade organization in which Ameri- 
can export firms and associations compete. Regardless of the 

Controlling World Trade 

success of international efforts to reduce trade barriers, it must 
be expected that the postwar economy will continue to be 
characterized by state export and import monopolies, state- 
encouraged import and export associations and domestic 
cartels, with or without state participation. If such inter- 
national efforts meet with only slight success, the regulation of 
international trade by cartels and producer-oriented com- 
modity agreements may be extensive. 

Under these circumstances a reasonable interpretation of 
the antitrust acts would recognize: 

1. That export associations have an important function to 
perform, and that self-limiting of competition, as among mem- 
bers in their export trade, is sometimes necessary to its per- 

2. That the participation of American firms, and particularly 
their foreign subsidiaries, in restrictive agreements limited to a 
foreign area is sometimes necessary to American exports or to 
business activity abroad and, in any case, is properly subject 
to the jurisdiction of the government or governments of the 
area in question. 

It seems probable that the antitrust acts will be so inter- 
preted as to permit activities of the sort described above. A 
more debatable point concerns participation of American ex- 
port firms and associations in international agreements that 
limit competition in third countries or divide world markets. 
Although participation in such agreements may frequently 
increase profits per dollar of sales, it is not a requisite to meet- 
ing competition and, in general, tends to lessen the total 
volume of exports. Since the interest of the United States is 
in a large volume of profitable exports rather than in maximum 
profit per unit of export business, American participation in 
such agreements should be discouraged. 

A^merican participation in international business agree- 
ments restricting either imports into the United States or the 
exports of American firms outside the agreement is clearly il- 
legal. There appear to be no interests of the United States 

• 6 • 

Summary of Recommendations 

broader than the preservation of competition that can effec- 
tively be served by participation in such agreements; conse- 
quently, no convincing case can be advanced for a change in 
antitrust standards as applied to international business agree- 
ments of this sort. 

The language of the antitrust laws is extremely general, and 
the business agreements that fall within their scope are of 
infinite complexity. In these circumstances, the enforcement 
agencies have not only large discretion but large responsi- 
bilities in selecting the cases to be brought, and the courts have 
broad discretion and responsibility in their adjudication. A 
reasonable line of policy toward American participation in in- 
ternational business agreements lies within the meaning of the 
antitrust laws, and, unless or until it becomes clear that either 
such a line is not being pursued or the postwar organization of 
world trade is so very different from what has gone before that 
present legislative standards are inadequate, no change in the 
antitrust acts as applied to international business agreements is 

^ :)( :|c H: ^ ^ 

International patents and processes agreements have fre- 
quently been used to consummate schemes of market regula- 
tion that extend considerably beyond the patent rights in- 
cluded in the agreement. Attempts to enlarge patent monop- 
olies by restrictive agreement are of course illegal, and there is 
nothing in the international character of a patents and 
processes agreement that would justify practices found illegal 
in domestic trade. It is possible, moreover, for countries whose 
nationals participate in such agreements, to lessen the re- 
strictive effects by legislation reducing the scope of the patent 
rights conveyed. Since, however, the modification of patent 
rights is essentially a domestic problem, no recommendation 
on this subject is contained in this report. It is sufficient to 
note that the international aspects of this problem appear in 
no way appreciably to affect the merits or demerits of domestic 
patent reform. 

. 7 . 

Controlling World Trade 

The security aspects of restrictive business agreements may 
be divided into those that bear on American preparations for 
war and those that bear on the question of miUtary aggression. 

As to the former, it is alleged that American participation in 
restrictive international business agreements hampered our 
war production and aid to our allies and facilitated enemy 
espionage and fifth-column activities in the United States. 
It is argued later that these consequences have been greatly 
exaggerated. In any case, the convention and policies sug- 
gested above would, of course, cover agreements affecting 
military items as well as other products. Insofar as restrictions 
on production and trade are attached to the legitimate ex- 
change of legitimate patent rights, they would remain un- 
touched, though the scope of such rights, as indicated above, 
is capable of reduction by legislation. It is the opinion of the 
author that the advantages of technological interchange have 
far outweighed the disadvantages of restrictions in use of 
technology, even in the frequently illegal international patents 
and processes agreements of the past. It is possible, however 
to preserve these advantages while reducing markedly the ex- 
tent of the restrictions. 

Ordinary commercial espionage, subversion and sabotage 
may be facilitated by almost any kind of alien commercial 
connection in this country and certainly by the maintenance 
of branch plants and subsidiary firms. Such activities have no 
special connection with international business agreements, 
restrictive or other. Patents and processes agreements, how- 
ever, may lend themselves to espionage as regards the design 
of military items and information on the number of units 
produced. It seems desirable that the Army and Navy pay 
closer attention than they have in the past to the terms of 
foreign patents and processes agreements into which their con- 
tractors may enter. No new legislation appears to be necessary 
to safeguard secret patents or processes of a military nature. 

The argument that restrictive business agreements both 
domestic and international have a close connection with 

Summary of Recommendations 

military aggression is sometimes, with engaging simplicity, 
stated as follows : the cartels brought Hitler to power and 
Hitler made war; therefore, cartels were a if not the source 
of German aggression. 

There is no doubt truth in the contention that Nazi Ger- 
many used the cartel connections of its nationals in certain in- 
stances to further German war aims, just as it used all other 
foreign connections of its nationals, but the number of cases in 
which the activities of German cartel participants cannot 
be completely explained on an ordinary profit basis is ex- 
tremely small. It will probably be wise, as a part of the peace 
settlement, to go as far as possible in breaking the inter- 
national cartel connections of German firms, but principally 
for reasons of commercial policy and not security. It will cer- 
tainly be advisable for the Allied governments to acquire and 
to exchange fully with one another the results of German 
technological development. 

Any durable policy toward the cartel connections of German 
firms, however, will be dependent on the measure of success 
that attends the adoption of cartel policy by international 
agreement. In the long run the Allies will find it impossible 
to impose on a defeated enemy a higher standard of commer- 
cial morality than they are willing themselves to practice. 

The period of military government will permit the Allies — 
theoretically at least — to pursue a certain policy toward the 
internal organization of industrial Germany. Even if an 
antitrust policy were considered desirable, however, the zonal 
occupation of Germany, the almost inevitable swing toward 
government ownership, the tendency of military government 
to use established institutions — in which domestic cartels 
must be classed — and the recalcitrance of any population to re- 
forms imposed from outside by an enemy cast doubts upon its 
success. It must be emphasized that, although the domestic 
cartel was an important type of business organization in the 

. 9 . 

Controlling World Trade 

socio-political environment that produced Hitler, and although 
the structure of the domestic cartel was readily adapted as an 
internal instrument of control in Nazi Germany, there is no 
reason whatsoever to believe that the existence of any imagi- 
nable alternative type of business organization would, in that 
particular context, have led to a different result. Nor is there 
any reason to believe that the application, from outside, of 
antitrust measures will make any appreciable difference in the 
social, economic and political structure of postwar Germany. 




ALTHOUGH international business agreements were com- 
^ monly encountered before the First World War, it was 
in the period 1920-1940 that they increased in number, 
changed in character and involved American participation 
to an extent requiring a reformulation of public policy. 

A very large number of international business agreements, 
regulating and limiting foreign trade, grew out of the eco- 
nomic dislocations of the First World War. War-created excess 
capacity, notably in the heavy industries, led to agreements 
designed to protect domestic markets and to limit export 
competition. The numerous agreements that together made 
up the European steel cartel were spawned by such excess 
capacity. The territorial division of business properties in the 
Balkanization of Central Europe on occasion substituted 
international cartels for what were formerly domestic cartels 
or combines. The industrial concentration and business 
cooperation incident to military production in all the warring- 
countries persisted in postwar Europe as it did in the United 

A special set of international business agreements grew out 
of the vesting of enemy properties in the various Alien Property 
Custodians during the war period. American and British 
firms acquiring the properties frequently lacked the technolog- 
ical experience or foreign outlets of the German parent 
firms; they entered into business agreements with them and 
thereby substituted an American-German or a British-German 
cartel relationship for a German parent-subsidiary relation- 
ship. The well-known agreements between the Sterling 

• 11 • 

Controlling World Trade 

Products Corporation and the predecessors of I. G. Farben 
were of this sort. 

After the war, Germany in particular, but other European 
countries as well, witnessed an acceleration in the process of 
industrial concentration that affected exports as well as pro- 
duction for the domestic market and thereby facilitated inter- 
national agreement by export interests. Postwar inflation 
wiped out many a small competitor, and the ensuing period 
of lavish foreign lending, particularly by the United States, 
favored the growth of firms large enough to borrow in foreign 
capital markets. Hitler's Aryanization policy, the consolida- 
tion of cartels, and compulsory cartelization, together with 
the expansion of combines incident to war expenditures of 
the 193*0's, hastened both industrial concentration and the 
monopolization of export trade. 

Even in England, of all European countries the slowest to 
be weaned a*way from competition, the changes since 1932 
in the organization of both domestic and export industries 
have been remarkable. Impelled by a revolutionary shift in 
tariff policy, British industrialists, through their trade and 
export associations, have gone far toward substituting ne- 
gotiation for competition in the determination of output and 
prices, both domestic and export.^ 

1 The best description of the truly remarkable limitation of competition in 
Britain since 1932 is still the pamphlet by Ben W. Lewis, Price and Production 
Control in British Industry, University of Chicago Press, Chicago, 1937. Cf. p. 4. 
The tariff provided the essential condition, the long-continued depression and 
the government's defense program have furnished the immediate motives. By the 
end of the depressed 'twenties, British industrialists were tired of stealing each 
others' businesses by ruining their own, and, like industrialists everywhere, they 
saw price cutting and other incidents of the depression only as competitive ex- 
cesses which could and should be curbed by simple rules and restraints. The 
British government, feeling keenly the plight of unemployed capital and labor, 
aware of the growth of nationalism throughout the world, and face to face with 
the fact that preparedness for modern war means continuous and complete 
mobilization of industry even during times of peace, has found it essential to its 
program that British industries be organized as units and that each be repre- 
sented by an association empowered to speak for and to commit each and all its 

• 12 • 

Statement of the Problem 

Industrial self-regulation in the domestic market makes 
easier, if not inevitable, self-regulation in the export market. 
If firms agree not to compete at home, they are unlikely to 
compete with each other for foreign sales. Moreover, or- 
ganization of the home market, insofar as it facilitates the 
formation of export associations, establishes the necessary 
mechanism for an international agreement that will under- 
take regulation on a broader scale. The reverse operation, 
though less frequent, also sometimes occurs: the organiza- 
tion of producers for export may modify the degree of 
competition among them in the domestic market. If an 
attempt is made, as in the United States, to differentiate 
between the legality of business associations for export and 
those for domestic markets only, serious complications are 
bound to ensue. The fact is, the process of concentration that 
has advanced apace in all industrial countries since the end 
of the First World War is directly related to the increase in 
numbers and effectiveness of international business agreements. 

Commercial policies pursued in the period between the 
wars have indirectly added fresh stimulus to such agreements. 
Tariffs, exchange restrictions and other trade barriers, in 
making exports more difficult, have encouraged the establish- 
ment of branch plants and affiliates in foreign territory. 
Many American firms, which under freer trade conditions 
would have exported, have responded to trade restrictions by 
establishing producing subsidiaries abroad. These subsidiaries, 
in turn, operating in jurisdictions in which both domestic 
and international cartel participation was the rule, have 
entered frequently into international business agreements. 
Trade barriers have also encouraged technical data agree- 
ments and patent licensing. Unable to export goods, firms 
have exported technical know-how and have licensed patents 
with the various restrictions permitted by local law. 

Although international business agreements have been far 
more common among nationals of European countries than 
elsewhere in the world, American participation in such agree- 

• 13 • 

Controlling World Trade 

ments increased enormously after the First World War. The 
Webb-Pomerene law of 1918 legalized export associations. 
Whether it was the intention of the law to permit these asso- 
ciations to enter into international market-regulating agree- 
ments, a number of them did. Extensive participation of 
American firms in technical data agreements dates from the 
1920's. . American subsidiaries and affiliates abroad have 
entered freely into foreign domestic and international cartel 
arrangements and, in some cases, would have found it difficult 
or impossible to continue in business had they abstained. 
Concentration in the domestic market, which continued in the 
United States as in other countries in the years between wars, 
undoubtedly gave impetus to international business agree- 


To date, little has been done by governments, except in the 
United States, to prevent or in any way obstruct their na- 
tionals' participation in international business agreements 
that restrict and regulate competition in the export trade. 
On the contrary, governments have joined in directly, as 
cartel members and supporters of their national firms, and 
indirectly, through the implementation of commercial policies 
that stimulated international business understandings . Govern- 
ment-owned potash properties were members of the inter- 
national potash cartel. French and German government 
aluminum firms were a part of the international aluminum 
cartel. The mercury properties of the Spanish and Italian 
governments marketed their product through a common sell- 
ing agency and shared the export market in agreed propor- 
tions. The Soviet government has been party to a number of 
international cartels..^ Governments participating in inter- 

1 Although considerable obscurity surrounds the subject of Russian cartel 
participation, the available evidence indicates that, through her export trusts 
and state trading companies, Russia has taken part in at least three inter- 

• 14 • 

Statement of the Problem 

national business agreements as proprietors have behaved pre- 
cisely as private proprietors, exhibiting no less keen an interest 
in a high price and an assured quota for their product on the 
world market. 

Governments have similarly supported the cartel operations 
of their nationals. Recalcitrant outside firms have been forced 
into the cartel, cartel regulations have been policed, and, in 
negotiations with foreign members, governments have upheld 
the claims of their nationals for a larger quota or more 
favorable terms. In the division of world markets by negotia- 
tion, the assistance of the state may be far more useful than in 
the conquest of world markets by competition. By making 
foreign trade an instrument as well as a concern of foreign 
policy, the power and prestige of the state are used in trade 
negotiations to reinforce the competitive strength of private 
firms. The adherence of governments, moreover, tends to 
make international business agreements stronger and more 
durable than mere private agreements. 

Many governments, in other words, have treated the cartel 
participation of their nationals as one of numerous administra- 
tive devices to implement commercial policy. Quantitative 
import controls may be exercised by the assignment of import 
quotas to cartel participants, a method frequently applied in 
the world oil trade. Government support of its nationals in 
cartel negotiations for export quotas is a recognized method 

national control schemes that might be classed as commodity agreements and 
eight international cartel arrangements. 

Commodity agreements: lumber, wheat, sugar. 

Cartel agreements: matches, platinum and platinum metals, asbestos, 

oil, electric lamps, phosphates, potash, soda ash. 
Although the structure of Russian foreign trade has probably subjected her to a 
loss from high cartel prices on imports greater than her gains from higher prices 
on exports made possible by cartel participation, and although reports emanating 
from Russia indicate an anticartel attitude in the postwar period, it may be con- 
jectured that, if international cartel arrangements continue to flourish, the 
Soviet government will show no hesitation in cooperating. In fact, representa- 
tives of the Soviet government have shown themselves as adept in negotiating 
for cartel advantages as in other aspects of international bargaining. 

• 15 • 

Controlling World Trade 

of trade promotion. Such activity brings about an inter- 
penetration of government and business that is foreign to the 
experience of the United States. American business has fre- 
quently envied the assistance its foreign competitors expect 
and receive from government. It has its price. One of the 
important considerations to be weighed carefully in the formu- 
lation of policy toward cartels is whether such assistance as 
government might render to American business in inter- 
national negotiations would be worth the price. 




The problems in the field of commercial policy posed by 
international business agreements may be viewed more clearly 
against the broader problem of international commodity con- 
trols, public and private. The nature of these controls and, in 
particular, the relation of government to business in their 
negotiation and administration tend to vary with the proc- 
essing stage of the commodity controlled. It is useful to dis- 
tinguish between (1) industrial raw materials and foodstuff's, 

(2) standard processed and semi-fabricated products and 

(3) highly fabricated, specialized and, frequently, patented 

International commodity controls for the first group have 
covered such materials as rubber, tin, oil, kapok, sulphur, 
asbestos, tea, cocoa, coff'ee, quebracho, quinine, nitrates, 
aluminum, copper, sugar, lumber, phosphates, wheat and 
potash. Certain of the controls in this range of products, for 
example, for coff'ee and wheat, have been governmental from 
the start. Others, for example, for copper and phosphates, 
have continued as purely private arrangements. 

For many of these items, however, international control 
systems, having begun as private cartels, have become, in the 
course of time, commodity agreements with more or less 
governmental participation. The trend is very clearly in this 

• 16 • 

Statement of the Problem 

direction, and we may expect increasingly in the postwar 
period to see international commodity controls in raw ma- 
terials take predominantly the form of commodity agree- 
ments. In the case of products of worker-owner industries, 
including all purely agricultural products, this is necessarily 
so. But even for commodities such as most minerals, whose 
production is highly concentrated, international controls, 
where they exist, may eventually be governmental. If copper, 
for example, is internationally controlled in the postwar period, 
it may well be by intergovernmental agreement. 

Numerous international controls have already been estab- 
lished for the second group, standard manufactured and semi- 
manufactured products. In this category belong cement, steel 
rails and other steel products, tin plate, cables, dyes, paper, 
linoleum, plate glass and many others. The international ar- 
rangements for these have been predominantly private, al- 
though governments have been increasingly active in coercing 
recalcitrant outsiders and in negotiating and policing the 
agreements. International business arrangements, covering 
both raw materials and standard manufactured products, 
have shown a tendency to break down without governmental 

The third group embraces highly processed and specialized 
products and is most extensively found in the chemical, 
electrical products, pharmaceutical, and optical glass in- 
dustries. In these fields, controls frequently depend on patents 
and trademarks; the highly publicized international technical 
data agreements fall mainly in this group. This type of control 
is almost exclusively private. Although governments have 
shown an awakening interest in the terms of these agreements, 
government assistance in their negotiation and administration 
is unusual and unnecessary to their success. 

The extent of governmental participation in international 
commodity controls tends to vary with the stage of processing 
involved, but the historical trend is toward increased participa- 
tion at all stages. The proper scope and character of inter- 

• 17 • 

Controlling World Trade 

governmental commodity controls is discussed ekewhere; it 
is only necessary here to emphasize that in any discussion 
among governments on the proper postwar role of inter- 
national business agreements the policy issues to be raised are 
not likely to be concerned primarily with the unauthorized, 
secret and unregulated cartel agreements. Even without an 
intergovernmental agreement on cartel policy, government 
participation in some form may be assumed for almost any 
important postwar international marketing arrangement, and 
even international technical data agreements, without signifi- 
cant marketing implications, may well be subject to scrutiny 
by governments. The real issue demanding international ac- 
tion is whether international business marketing arrange- 
ments shall be legitimized under some form of governmental 
control, or whether the scope of such arrangements is to be 


The two main questions that confront commercial policy 
as it relates to international business agreements involve trade 
barriers and private trading. 

The provisions of an international cartel agreement fre- 
quently set limitations on the trade of the participating firms. 
In so doing, they may also limit, directly or indirectly, the 
business of firms not parties to the agreement. The nature of 
the trade barrier, however, consists principally in restricting a 
participating firm's freedom to market its goods. Its exports 
must sell at a fixed price or in a particular market or only 
within certain quota limitations. Such arrangements un- 
doubtedly affect the physical volume of world trade, but more 
decisively they affect its channels. A typical cartel agreement 
will protect the domestic market of each participant from the 
others' competition and will allocate the remaining markets of 
the world among the various national groups. The sales of 
American participants will be limited to the United States or 

• 18 • 

Statement of the Problem 

to North America or to the western hemisphere or to a 
broader sphere depending on their relative strength and 

Although in a purely private agreement these limitations 
on a participating firm's freedom of action are self-imposed,,, 
the trend, as indicated above, runs strongly toward govern- 
mental direction and enforcement. If firms do business 
through cartels in the postwar period, it will be within an in- 
creasingly important set of governmental restrictions. Thus 
in any determination of cartel policy by international agree- 
ment, the issue of private trading as well as of trade barriers is 

The trade of outsiders may be hampered by cartel monop- 
olization of distribution channels, by various predatory 
practices or by state intervention in the interests of cartel 
participants. On the other hand, the "price umbrella" that 
cartels frequently hold over the market may, on occasion, work 
decidedly to the advantage of outsiders. The high prices of 
electric lamps maintained by the very comprehensive and 
restrictive Phoebus cartel had already led, by the outbreak 
of the recent war, to a rapid growth of outsider production in 
cartel territory. 

When international market-regulating business agreements 
are effective, however, there is no doubt that they reduce the 
total volume of world trade. Although an extensive business 
literature denies this, emphasizing the market-stabilizing 
functions of industrial self-government, with its "adjustment 
of supply to demand," the hampering effects of such schemes 
on production are too well established to need elaboration.^ 

1 The leading exponent of the view that cartels expand and stabilize inter- 
national trade is probably Lord McGowan of Imperial Chemical Industries. 
In a speech in the House of Lords, July 5, 1944, Lord McGowan said, in part, 
The purpose of those [international cartel] agreements is, in the main, to 
regulate but not to abolish competition. They can help to stabilize prices at a 
reasonable level . . . They can lead to a rapid improvement in technique and a 
reduction in costs, which in turn, with enlightened administration of industiy, 
can provide the basis of lower prices to consumers, lliey can spread the benefits 

. 19 . 

Controlling World Trade 

The real arguments for international cartelization under 
government auspices are (1) that, in the absence of interna- 
tional agreements regulating markets, governments will act 
unilaterally to protect domestic markets and export interests, 
with restrictive effects more harmful to international trade 
than those of the agreements; and (2) that, in certain eco- 
nomic situations characterized by chronic overproduction, 
temporary excess capacity or price instability, restriction of 
trade through international agreement is expedient. 

It must be emphasized that neither of these arguments is a 
good argument for unregulated private cartels. It should not 
be for private business interests to determine when an inter- 
national business agreement is needed to avoid more serious 
government restrictions, or when a market-regulation plan is 
desirable to obviate wasteful competition or uneconomic price 
instability. The issue presented for intergovernmental dis- 
cussion will not, therefore, be whether to allow or to forbid 
private international cartel arrangements. The issue, as 
stated above, involves a choice between authorizing cartel 
agreements under some type of government supervision or 
adopting a policy of curbing and limiting cartel arrangements. 


Undesirable restraint of foreign trade can, of course, be 
effected not only by business agreement but also by controls 
based on ownership and business affiliation. Combines, as well 
as cartels, can be international. A combine is a business or- 
ganization in which a number of legally distinct business 

of inventions from one country to another by exchanging research results, by the 
cross-licensing of patents and by the provision of the important know-how in the 
working of these patents. They can provide a medium for the orderly expansion 
of world trade and can make a substantial contribution — and this is important — 
to the difficult problems of the postwar readjustment of production in countries 
greatly affected by the ^va^. Tl>ey can also assist in providing much greater 
stability of employment. 

• 20 • 

Statement of the Problem 

units (subsidiaries or affiliates) are subject to unified direction. 
If the basis of the combination is ownership, the top direction 
may come from a holding company, a trust or a parent com- 
pany. The size and character of a combine's operation in 
international trade may approximate that of an international 
cartel. Certainly International Nickel's coverage of world 
markets is as pervasive as that of any cartel. To deal with the 
monopoly aspects of combines on an international level ob- 
viously presents unusual difficulties, which, however, do not 
concern us here. It is sufficient to recognize that barriers to 
both foreign and domestic trade may be as effectively raised 
by combines as by cartels. 

We are here using the term "private trade barrier" to mean 
the effects resulting from any serious degree of monopoly or 
restraint of trade. When the restraint is on foreign trade, the 
distribution of the effects as among countries raises certain 
questions dealt with in the next section. In the domestic 
economy, since the allocation of resources among uses or 
industries is distorted, the efficiency of employed resources 
may be reduced, and the income effects may lessen the total 
volume of employment. In general, the political vulnerability 
of large-scale enterprise, including cartels and combines, tends 
to jeopardize the stability of capitalist institutions. 

Substantial restraint of trade, through cartelization or com- 
bination, produces in the industry affected a smaller volume 
of output and employment of resources than would obtain 
under freer conditions of competition. These effects, however, 
are not additive for the economy as a whole. Resources not 
employed because of restraints in one industry are available 
for employment elsewhere. Consequently, one cannot add 
together the output deficits in industries affected by monopoly 
Eind thus determine the magnitude of the output deficit, due 
to monopoly, in the economy as a whole. If resources dis- 
placed by monopoly are employed elsewhere, the over-all 
effect is an underemployment in the monopolized sectors and 
an overemployment in the competitive, as compared to the 

• 21 • 

Controlling World Trade 

distribution of resources determined by unrestrained com- 

Displaced resources, however, may not necessarily be 
utilized elsewhere. The effect of a monopoly on total labor 
utilization depends primarily on its effects on savings in re- 
lation to available investment opportunities. Monopoly — 
and here we are discussing business rather than labor or 
agricultural monopoly — tends to alter the distribution of in- 
come in favor of profits and thereby, in the absence of com- 
pensatory taxation, to increase the proportion of total income 
saved. If investment opportunities are adequate to absorb 
the increased volume of savings, monopolization will have no 
effect on total use of resources. If such opportunities are 
deficient, a savings-investment difficulty may well cut down 

That substantial restraints of trade can decrease the 
efficiency of employed resources may be illustrated by the 
indifference that monopolized industry allegedly displays 
toward technical improvement.^ In the case of production 
costs, monopoly affects not so much the calculus of business 
decision as the spirit in which this calculus is approached. 
Considerations involved in the replacement of a machine, the 
introduction of a new technique or an organizational reform, 
are the same for a monopolist as for a competitor. A machine, 
for example, should be replaced v/hen the total unit costs of 
operating with a new one are less than the prim.e unit costs of 
operating v/ith the old one, and this calculation does not differ 
as between a monopolist and a competitor. Behind the pro- 
tection of a monopoly position, however, the will to reduce 
costs may weaken. The consequences should then be apparent 
in the inefficiency and technological backwardness of in- 
dustries enjoying such protection. Although it would be 
difficult to demonstrate this view statistically, it is probably 

1 Efficiency here means productivity per man, per acre, per machine, etc., 
operating wdth a given quantity of auxiliary resources. It does not mean pro- 
ductivity as affected by different quantities of auxiliary resources. 

• 22 • 

Statement of the Problem 

a justifiable inference from general observation of industrial 

When attention is focused on sales revenue, the existence of 
monopoly introduces considerations definitely unfavorable to 
technical improvement. To preserve total revenue from sales, 
firms enjoying a monopoly position are said to have sup- 
pressed products that would have a longer life or promise to 
sell for a lower price than those currently produced. It is 
alleged in the complaint against the Diamond Match Com- 
pany and others that the patents on an "everlasting" or 
"repeating" m.atch were not utilized because this m.atch was 
regarded as "a distinct danger to the American match in- 
dustry."^ It has been cogently argued that the introduction 
of fluorescent lighting was seriously hampered, partly be- 
cause of pressure from electric utility interests who anticipated 
lower consumption of electric current.^ It has been rumored 
that rubber interests united in the rubber cartel thi'eatened 
to withhold supplies from American tire manufacturers unless 
they ceased research on synthetic rubber. 

1 The technological backv/ardness of certain basic British industries, notably 
textiles, coal and steel, and the supposed technological backv/ardness of British 
industry in general, are the text of frequent sermons, both here and in England, 
on the pernicious effects of monopoly. The British textile industry, however, 
showed a low ouput per manhour long before it ever enjoyed the benefits of 
monopoly in the form of industrial self-govei-nment. Active discussion of the 
obsolescence of British steel installations goes back at least 60 years, and the 
backwardness of the coal industry is a perennial topic. Furthermore, some of 
the most monopolistic of British industries, notably chemicals, appear to be 
highly efficient by international comparisons. 

Reasons for the differences in manhour productivity in a given industry in 
different countries and for differences in the rate of increase in productivity are 
obscure, and it is not entirely clear that the presence or absence of monopoly has 
much to do v/ith it. It is probably truer to say that a limitation of competition 
in a given industry is favored because of technological backwardness than to say 
that such a limitation is the cause of the industry's technical backwardness. 

2 Complaint filed May 1, 1944, Southern District of New York cf., p. 49. 

^ Hearings before Committee on Patents, U.S. Senate, 77th Congress, 2d 
Session, 1942, Part 9, pp. 4, 753-780. Testim.ony of John W. Walker, Attorney, 
Antitrust Division. This committee will henceforth be referred to as the Bone 

• 23 • 

Controlling World Trade 

Whatever the merits of these particular allegations, there 
can be no doubt that a monopoly position provides induce- 
ment for the withholding of new products that would aflfect 
revenue from sales — a consideration of little interest to a firm 
in a competitive position. 


International cartels and combines have the same over-all 
effects as the domestic variety, but the way these effects are 
distributed as among countries, together with certain political 
and economic differences affecting their operations, raises 
special questions. 

If the whole of the output of an industry is consumed at 
home and none of the product in question is imported, the 
magnitude of consumer interest in a national welfare 
calculus will approximately equal the magnitude of producer 
interest. When exports and imports are involved, however, 
a country may have predominantly a producer or consumer 
interest in a commodity or group of commodities. The 
cartelization of an export commodity may raise its price, but 
it is possible that the increase in consumer cost will be borne 
entirely or largely by foreign consumers. The cost to a 
foreign consumer, as is well known, is his own "lookout." 
An intergovernmental commodity agreement may, of course, 
have the same effect; hence the current demand for consumer 
representation in these agreements. Such representation is 
unlikely to take place in an international business cartel. 

If cartelization is practicable chiefly for manufactures, a 
group of industrial countries may find it feasible to export at 
cartel-controlled prices and to import raw materials and food- 
stuffs at prices determined on competitive world markets, 
thus improving their terms of trade. The industrial countries 
of Western Europe — Germany, England, Belgium and others 
— were in somewhat this position before the war. The difficult 
balance-of-payments problems confronting these countries 
in the postwar period will make favorable terms of trade even 

• 24 • 

Statement of the Problem 

more desirable. Effective international commodity controls 
in the foodstuffs and raw materials chiefly imported by these 
countries would worsen their terms of trade and might inten- 
sify the demand for cartel control of the prices of their exports. 

Division of markets and cartel quotas serve to protect 
domestic markets and to lessen competition among cartel 
participants for third-country markets. Such barriers to trade 
are frowned on domestically, but, as protective tariffs indi- 
cate, foreign trade is considered a different category. As 
a protective device, a cartel arrangement is frequently a 
substitute for, or a supplement to, a tariff. Since international 
negotiation, frequently multilateral, is involved, the trade as 
among the participating countries or between them and others, 
in a commodity or group of commodities, is regulated by 
agreement. If governments participate in or supervise the 
negotiation, the resulting agreement may enjoy the protective 
coloration of the public interest. 

There are those to whom an international agreement itself 
means progress, regardless of what is agreed. One of the prin- 
cipal arguments for intergovernmental commodity agree- 
ments is that, as against unilaterally imposed tariffs, export 
bounties and other impediments to trade, they would intro- 
duce a common policy representing a reconciliation of con- 
flicting national interests. The same argument can be ad- 
vanced for appropriately regulated international cartel agree- 

In the domestic market, the rules of the game are deter- 
mined, by and large, by one authority, and all trading units 
are governed by these rules. In the international market, 
however, a multiplicity of trading units and of rules prevails. 
State monopolies, cartels, and import and export associations 
exist side by side with private traders and play the game from 
different rule books. Although corresponding analogies may 
be said to exist in the domestic market, actually the situation 
that confronts the private trader abroad is substantially 
different. It can be argued, therefore, that the pros and cons 

• 25 • 

Controlling World Trade 

of international cartelization must also be different from 
domestic monopoly. 

Finally, international trade has become a strategic phase of 
international relations, in which arise questions of national 
power and prestige, of war and peace. Although it is by no 
means clear that, on balance, a division of world trade by 
business agreement is any more destructive of international 
harmony than a division of world trade by unregulated com- 
petition, international relations may be markedly disturbed 
by certain cartel and combine practices. Monopolistic exploi- 
tation of the foreigner is viewed more favorably at home than 
the exploitation of domestic consumers, but it may cause 
more dislocation in the end by provoking retaliation and 
creating international tension. Furthermore, although it is 
true that foreign-trade connections will continue to be used 
for political ends as long as foreign trade continues, cartel 
connections offer certain opportunities for state manipulation 
not shared by other business forms. 

These are the reasons why monopoly in foreign trade pre- 
sents particular problems that differ from those in the domestic 
market, even though the over-all economic effects of both are 
much the same. 


Useful as it would be to have some quantitative measure of 
the effect of monopolistic restraints on total national output 
or on the volume of international trade, any precise notion of 
these magnitudes is clearly not to be had. It has been recently 
estimated that perhaps 40 to 50 per cent of the total volume of 
world trade is subject to some degree of cartel control,^ but 

1 Frederick Haussmann and Daniel Ahearn, "International Cartels and 
World Trade; An Exploratory Estimate," Thought (Fordham University 
Quarterly), Vol. XIX, No. 74 (September, 1944), p. 434. 

Taking into account the inaccuracy of the estimates due to the lack of exact 
statistics, we come to the basic conclusion that 42 per cent of world trade between 
1929 and 1937 were cartelized or influenced by loosely knit associations or con- 
ferences. This is a minimum estimate. 

• 26 • 

Statement of the Problem 

this does not tell us whether world trade would have been 
greater in the absence of these controls and, if so, by how much. 

In default of measurement it is only possible to venture a 
judgment, more or less informed, on the quantitative signifi- 
cance of international cartels and combines. To be operative, 
such a judgment must be related to the question of how far 
trade and output (for the world or for the United States) 
would be expanded by a practical anticartel policy — either 
unilateral or intergovernmental — as against trade and output 
governed by the most probable alternative policy. How 
significant a change would take place in channels of trade? 
What would be the magnitude of the effect on domestic com- 
petition? How significantly would international relations be 
improved, if at all, by such a policy? 

International negotiations demand that a judgment of this 
sort be made, since the United States, like every other country, 
can attain certain objectives only at the expense of others. 
Specifically, how much of the rest of our foreign economic 
program are we willing to give up to get a measure of agree- 
ment on an international cartel program? If the nations of the 
world were of a like mind with respect to proper policy on car- 
tels, and would adhere with equal fervor to such a policy, no 
such question would arise; unfortunately this is not the case. 

In the absence of measurability, the cartel problem can be 
made to loom very large. In a recent book by Wendell Berge, 
Chief of the Antitrust Division, U. S. Department of Justice, it 
looms very large indeed. ^_ 

Cartels are in essence private governments which threaten to 
subvert and even engulf duly constituted authority. ^ . . . Total- 
itarianism represents simply the ultimate consummation of cartel- 
ism — the final, full expression of the reactionary forces stemming 
from special privilege.^ . . . The greatest threat to our success in 

^ Cartels: Challenge to a Free World, Public Affairs Press, Washington, D.C., 

2 Ibid., p. 3. 

3 Ibid., p. 3. 

• 27 • 

Controlling World Trade 

achieving full production and full employment at home, and friendly 
cooperation with other nations abroad, is the philosophy and prac- 
tice of privilege embodied in cartels.^ . . . These private govern- 
ments threaten the sovereignty of democratic nations. The political 
implications of cartel activity threaten to subvert future national 
public policy of the United States.^ 

If these statements are taken literally, it follows that an 
anticartel policy is the most important step the United States 
could take (1) to secure peace among nations, (2) to main- 
tain democracy here and abroad, (3) to bring about an ex- 
pansion of foreign trade and (4) to promote full domestic em- 
ployment. It would also follow that in international security 
negotiations an anticartel policy should be the principal con- 
tribution of the United States; that in commercial policy 
negotiations such objectives as reduction of the scale of im- 
perial preferences, curtailment of exchange rationing, tariffs 
and other trade barriers are definitely secondary to anticartel 
objectives; and that, at home, stringent enforcement of the 
antitrust acts should be our primary concern in assuring the 
maintenance of employment. 

Such an evaluation of cartels, domestic and international, 
which is typical of dicta in recent Congressional hearings and 
antitrust pronouncements, seems to the author absurd and at 
variance with what can be and is known of present-day eco- 
nomics, politics and international relations. He would ven- 
ture as his opinion (later to be discussed) that the injury in- 
flicted by tariffs on domestic competition and American foreign 
trade has been several times greater than the effect of cartels; 
that current agricultural policy is likely to be such more dam- 
aging to exports than the total of American cartel practices; 
that intergovernmental commodity agreements will reduce 
the volume of postwar world trade more drastically than 
international cartels; and that the problem of dealing with 

1 Op. cit., p. 10. 
^ Ibid., p. 11. 

• 28 • 

Statement of the Problem 

state trading monopolies will far overshadow the difficulty of 
dealing with cartels. 

This judgment does not deny the importance of the inter- 
national cartel problem. Unfortunately, however, the post- 
war foreign economic policy of the United States bristles with 
"problems," and what to do about international business 
agreements is only one and not necessarily the most significant. 


In its natural habitat, the word "cartel" describes what 
business firms do in agreements to fix prices (price cartels) or 
terms of sale (conditions cartels), to limit and pro-rate output 
(quota cartels), to define unit costs (calculations cartels), 
and so forth. ^ The primary emphasis of the definition is on 
neither the motive nor the effect produced on the state of com- 
petition, but on what the participating firms agree to do. 
An international cartel is an agreement, of the sort just 
described, among firms and associations domiciled in different 
countries. It is obvious that, in this sense, a cartel may or may 
not unreasonably restrain trade. It is equally obvious that 
cartel practices do not embrace all possible restraints of trade. 

When the term cartel is used in an American context, how- 
ever, it carries the rich complex of meanings attaching to our 
law and policy respecting restraint of trade. Thus a cartel be- 
comes an association of firms in the same industry or trade 
having the purpose or effect of unreasonably restraining trade. 
Whether an association that does certain things has the pur- 

1 In essence, a cartel agreement is an enduring limitation, or set of limitations, 
self-imposed by contract, on the freedom of participating firms in the same in- 
dustry or trade. The limitation may be negative, as when the firms agree not 
to sell through certain channels, or positive, as when the firms agree to use 
standard accounting procedures. The effect on competition will depend on the 
share of the market covered by the agreement and the extent and character of the 
limitations imposed. No statement of motives, other than the platitude that the 
agreement is undertaken to promote the interests of the participating firma. -will 
embrace all the cases intended to be covered by the term "cartel." 

• 29 • 

Controlling World Trade 

pose of restraining trade or in fact does restrain trade is, then, 
a matter to be judged by a long line of judicial precedents. 
Export associations are cartels in the European sense of the 
term, but they are rarely referred to as cartels in American 
trade literature, presumably because the kind of restraint of 
competition they are supposed to undertake is considered 
reasonable within the meaning of the antitrust laws. 

Defining a cartel becomes particularly difficult when patents 
and processes agreements are involved. Not every patent- 
licensing or exchange agreement is presumed to be a cartel, 
but only those that unreasonably restrain trade. Since, 
however, the line dividing action under legitimate patent 
rights from restraints of trade within the meaning of the anti- 
trust acts is continually shifting, the definition of a patent car- 
tel at any one time is ambiguous, to say the least. 

Current discussion of public policy respecting international 
business agreements has not been much clarified by the usage 
accorded the terms ''cartel" and "combine" in recent Con- 
gressional hearings. The terms are either not defined at all 
or, if defined, are subsequently broadened to covei practically 
the whole field of business practices in foreign trade. 

The author is not aware of any specific or limited meaning 
assigned by the U.S. Department of Justice to the term 
"cartel." Wendell Berge in his recent book. Cartels: Challenge 
to a Free World, is of the opinion that if the Sherman Act were 
passed today it would be called not an Antitrust Act but an 
"Anticartel Act."^ This would appear to mean that, as a 
modern, streamlined version of the word "trust," the preferred 
usage of cartel is political rather than descriptive. 

This is, of course, a legitimate and useful way of employing 
the word "cartel." It was the way "trust" came to be used in 
agitation for anti-monopoly legislation and enforcement, and 
it is safe to say that, for this purpose, if trusts had not existed, 
some other term would have had to be invented. In the 
word "cartel" the enforcement agencies clearly have a very 

1 op. cit., p. 2. 


Statement of the Problem 

valuable political property. No one can be publicly in favor of 
"cartels," just as no one could be in favor of "trusts." If the 
term "cartel" can be successfully tagged to an organization or 
practice of which one disapproves, the battle is as good as won. 

There are then at least three ways in which the term "car- 
tel" may be and is used: the first, an economic usage, em- 
ploys the word to describe a certain type of business associa- 
tion; the second, a legal usage, looks to the purpose or effect 
of the association in unduly restraining trade as that phrase is 
currently interpreted; the third, or political, usage employs 
the term as a stick to beat "malefactors of great wealth," 
"economic royalists" and their ilk. 

The "cartel problem" as discussed in this report means the 
problem of trade barriers imposed by private business agree- 
ments. When the word "cartel" is used in these pages, it is in 
its legal context. The less colorful term "international busi- 
ness agreement" obviously embraces a much larger range of 




WE ARE concerned in this chapter with the possibiHties 
of formulating a cartel policy by way of intergovern- 
mental agreement, postponing to Chap. Ill a consideration of 
such policies as the United States might pursue in default of, 
or as a supplement to, intergovernmental agreement. What 
is recommended is essentially an agreement among govern- 
ments to apply a rather drastic set of prohibitions to participa- 
tion by their nationals in international arrangements re- 
stricting output, dividing markets, fixing prices and in other 
ways restraining trade. These prohibitions would apply 
equally to producers of primary and manufactured products. 

It is recognized that the existence of chronic surpluses in 
some primary products may warrant a limited number of 
intergovernmental agreements to reduce output and exports 
and to stabilize prices. This is discussed in Part IL Justifica- 
tions for intergovernmental regulation in certain circum- 
stances affecting both manufactured and primary products 
are treated at length in Part II but need to be mentioned 
briefly here. 

Intergovernmental agreement to control the shipment of 
materials or weapons of war may become an accepted security 
measure. Oil and minerals sanctions have been most fre- 
quently discussed, but sanctions can also be applied to manu- 
factured products. As the United Nations organization takes 
shape, the administration of international trade controls over 
war materials will presumably rest with the Security Council. 
Conceivably a substantial volume of international trade might, 
at times, be subject to such control. 

So long as certain materials and manufactures remain in 

• 32 • 

Cartel Policy by International Agreement 

short supply, a justification exists for intergovernmental ma- 
chinery to handle their allocation. The Combined Boards or 
their successors will be concerned with shortage problems 
until well into 1946; the European Coal Organization and the 
Emergency Economic Council for Europe are both required 
to allocate the European output of items in short supply among 
various claimant countries. Presumably, however, this par- 
ticular requirement for intergovernmental commodity coop- 
eration will be of short duration. 

International trade in various drugs and narcotics has been 
under control by intergovernmental agreement for years, and 
the extent of this control may well be increased. 

A group of public utility industries including aviation, 
shipping and telecommunications belongs neither in the 
category of raw materials nor of manufacturing but will cer- 
tainly be subject to intergovernmental control. These in- 
dustries, however, present special problems not considered in 
this report. 

Finally, intergovernmental agreements for the conservation 
of irreplaceable resources may be justified in certain cases. 
This is, by definition, a raw materials problem and is discussed 
in Part II. 


The argument most frequently advanced for intergovern- 
mental commodity control has hinged on the existence of 
excess capacity with accompanying "cut-throat" competition, 
and the need for a rational scaling down of such capacity. 
It has been noted in Chap. I that surplus capacity called into 
being in the First World War was a potent cause of cartel 
formation in the interwar period. Similar dangers due to 
overexpansion have in all probability been created by the 
Second World War. 

At this stage of postwar reconversion, when data are almost 
completely lacking on the amount of physical destruction in 

• 33 • 

Controlling World Trade 

Europe, on the quantities of equipment to be transferred to 
each claimant on reparations account and on the probable 
volume of demand, it is impossible to estimate the prospective 
magnitude and point of impact of this production imbalance. 
It requires no special sources of information, however, to 
know that the machine-tool industry, various branches of 
the engineering trades, aluminum, magnesium, nitrogen 
and a number of other industries will have a very large excess 
of fabricating capacity. In the absence of governmental 
prohibitory action, the exigencies of this surplus capacity are 
almost certain to lead in some industries to the formation of 
cartels. If cartels are forbidden, a number of governments 
are likely to be confronted with pressure for protection of the 
domestic market and for possible public assistance in expand- 
ing exports, pressure that will be hard to resist. If domestic 
markets are protected but the regulation of exports by inter- 
national business agreements is prohibited, it is quite probable 
that firms in the overexpanded industries will organize the 
domestic market and dump their surplus abroad to compete 
with the surplus product of other countries. Such practices 
are almost certain to produce reprisals in the form of tariff and 
quota impositions elsewhere. No anticartel policy, however 
clearly designed to expand the volume of world trade, is likely 
to be able to exorcise the war-created surplus fabricating 
capacity that will exist in many areas. At this stage of eco- 
nomic development, any solution that looks to restoring the 
operation of competitive market prices by v^/ay of wage re- 
duction, bankruptcy, etc., is no longer practicable. What 
must be recognized is that the cartel remedy, though at best 
a palliative and at worst a serious impediment to the flow 
of international trade and the maintenance of domestic 
prosperity, is manifestly at hand and, in the absence of positive 
measures to deal with industrial maladjustments, is likely to be 
used. The success of a policy of cartel limitation by inter- 
national agreement would appear to be closely related to the 
availability of alternative measures for dealing with postwar 

• 34 . 

Cartel Policy hy International Agreement 

dislocations for which cartels have been a traditional ex- 

One example out of many may be cited to illustrate the 
nature of the problem: the case of synthetic nitrogen. Even 
before the war, European nitrogen capacity was substantially 
in excess of peak domestic plus export requirements. In 1938 
the European Nitrogen Cartel (Gomptoire Internationale de 
I'Azote) was formed, including Imperial Chemicals, Stickstoff 
Syndikat (the marketing organization of I. G. Farben), the 
Solvay Company of Belgium, and French and Norwegian 
producers. The sole important exporter of natural nitrates, 
the Chilean Nitrates and Iodine Sales Corporation, partici- 
pated in these cartel operations through its London sub- 
sidiary. Apparently, Chile was assigned the United States and 
Egyptian markets, since imports of European nitrogen into 
these countries became conspicuously small, while at the same 
time Chilean exports to Europe were drastically limited. 
The European cartel attacked the problem of excess nitrogen 
capacity by concentrating production in a smaller number of 
plants. On the outbreak of war the operations of the cartel 
were, of course, terminated. 

As wartime nitrogen requirements for explosives increased, 
fabricating capacity was enormously expanded not only in the 
German-occupied areas but in the United States, Canada, 
Great Britain and Russia. Chilean exports to the United 
States increased too, and were limited only by shipping avail- 
ability. Although the United States before the war was a large 
importer of nitrogen, a conversion to peacetime use of all 
seven of the government-owned plants would leave us with a 
capacity far above the most optimistic estimates of domestic 
requirements. Even if the U.S. Department of Agriculture 
recommendation for the conversion of 300,000 tons (out of 
approximately 600,000 tons of government-owned capacity) 
is accepted, we should still have a capacity that would com- 
pletely free us from dependence on imports. 

Once the United States ceases to import, Chilean nitrates 

• 35 • 

Controlling World Trade 

will be forced to seek a more extensive share in the European 
market. They will there have to meet the competition of the 
already greatly expanded European production. Although 
European relief needs will keep nitrogen in short supply for 
perhaps a year, potential excess capacity is so large that the 
reconstitution of the cartel is already rumored. 

One "solution" of this problem would be the formulation of 
an intergovernmental commodity agreement, establishing ex- 
port quotas for the principal nitrogen-exporting countries and 
stabilizing prices. For various reasons discussed in Chap. VII, 
the United States may not consent to participate in such an 
agreement. Important differences between excess-capacity 
situations in manufacturing and in agricultural industries 
make intergovernmental agreement an even more unsatisfac- 
tory arrangement in the former than in the latter. The case 
for intergovernmental agreements in certain agricultural prod- 
ucts is developed at length in Part II; the argument rests, 
briefly, on three considerations: 

1. Serious surpluses in agricultural products resist correc- 
tion by competitive niarket forces and tend to become chronic. 
Output is normally unresponsive to downward price changes 
over a short or even a moderately long period. Producers can- 
not improve their position by individual output restriction, 
and their number is so large that organized curtailment of 
output is usually impractical. The movement of producers out 
of agriculture is extremely slow, and although shifts in crops 
are possible there are frequently serious limitations to very 
large shifts. Improvement through an increase in demand is 
handicapped, at least for certain basic foodstuffs, by the very 
low income elasticity of demand. For these reasons, basic 
agricultural products may be produced in surplus (relative to 
available markets) year after year. 

2. The number of people dependent upon the production 
of a given basic agricultural commodity may in some countries 
be a substantial fraction of the total gainfully employed, while 
the exports of the same product may be a very large fraction of 

• 36 • 

Cartel Policy by International Agreement 

total exports. The importance of coffee production and ex- 
ports to a number of Latin American countries, of wheat to 
Canada and Argentina, of wheat and wool to Australia and of 
cotton to the United States and to Brazil should be noted. A 
persistent depression of the price level of these products may 
have a serious effect on the balance-of-payments position of 
the countries involved (excepting the United States) and on 
domestic prosperity. 

3. As a consequence of (1) and (2) there is a disposition on 
the part of governments to protect the producers of basic agri- 
cultural products and the country's exchange position. Such 
unilateral action, met with the retaliation other countries are 
likely to attempt, can be more disruptive of international trade 
than an intergovernmental agreement sharing world markets 
among producers. 

For most manufacturing industries, the situation is sub- 
stantially different. The relative size of producers and ease of 
organization make it possible to avoid some of the price effects 
of excess capacity, at least in the domestic market. Although 
fixed capital cannot be shifted easily to other uses, the mobility 
of labor is generally much greater among industries than be- 
tween agriculture and industry. The income elasticity of the 
demand for manufactured products is usually greater than for 
foodstuffs; consequently, an increase in general prosperity 
will more appreciably benefit manufactures. There are few 
industries that account for so large a percentage of a country's 
total employment or total exports as basic agricultural items 
do in a number of countries producing primary products. 
If cartelization is available, excess manufacturing capacity 
may lead to the formation of cartels. In the absence of car- 
telization, there is no assurance that the kind of intergovern- 
mental agreement arrived at for regulating foreign trade in an 
agricultural commodity can be successfully applied in a manu- 
facturing industry. 

To the question, therefore, whether governments might by 
agreement desire to undertake the regulation of international 

• 37 • 

Controlling World Trade 

trade in industrial products one must join another and perhaps 
more important: whether they could if they so desired. One 
great obstacle lies in the variety of output of most manufactur- 
ing industries. The assignment of quotas and price stabili- 
zation are one thing for a graded or standard commodity such 
as wheat, cotton, sugar or tea, and quite another undertaking 
for the products of a typical manufacturing industry. But if 
private cartels can manage this task, why cannot govern- 
ments? Because, unless the participating governments are 
willing to leave all decisions on price, output, stocks, export 
quotas, channels of distribution and other matters to private 
producers — really setting up a cartel under government 
authorization, as the prewar tin and rubber agreements sub- 
stantially were — these governments would have to substitute 
their judgment for the judgment of private producers on mat- 
ters that are normally left to entrepreneurial discretion. This 
has in fact been done for a number of basic agricultural 
products in many countries. 

To undertake detailed regulation of a domestic manu- 
facturing industry, however, as a corollary to controlling that 
industry's foreign trade, is a task that lies outside the com- 
petence and ambition of most governments. Under con- 
ditions of government ownership, an intergovernmental 
agreement allocating markets and fixing prices might be 
practicable. Under the present dispensation, government 
participation in international agreements affecting manu- 
factured products can hardly go further than acquiescence in 
and support of the plans and policies of private cartel members. 
Governments may accept or reject these plans and, to a cer- 
tain extent, suggest modification as a condition of acceptance, 
but in the absence of public ownership the substitution of 
government for private decision on the essential matters of 
output and price appears to be impracticable. 

Where intergovernmental commodity or industry agree- 
ments are not feasible or are likely to be ineffective, what 
measures can be used to deal with war-created excesses and 

• 38 • 

Cartel Policy by International Agreement 

dislocations of fabricating capacity? Intergovernmental 
agreement to scrap such capacity is one possible expedient, 
made easier in some cases by the fact that a substantial part 
of this capacity is already in government hands. In general, 
however, the kinds of situation that appear partially to 
justify international restrictive agreements in manufactured 
products can be most successfully avoided by the achievement 
of domestic full employment. If the transfer of labor from 
overexpanded industries to other employment can thereby 
be accomplished, the main justification for a policy of price 
maintenance through output control is removed. Unless a 
high level of employment can be maintained in the principal 
industrial countries of the world, any attempt to prohibit re- 
strictive cartel practices by international agreement would 
appear to have little chance of success. 


Before turning to a consideration of what a program of 
curbing cartels by international agreement involves, the 
possibilities of cartel regulation should be noted. As suggested 
above, regulation is not likely to take the form, at least in 
manufacturing industries, of intergovernmental determination 
of proper prices, output, channels of distribution, etc. In any 
case, so far as the author is aware, no such plan has as yet been 
suggested.^ "Regulation "would probably be limited to ap- 

^ In an interesting but somewhat cryptic paragraph in his notable book, Full 
Employment in a Free Society, W. W. Norton & Company, Inc., New York, 1945, 
p. 238, Sir William Beveridge appears to advocate cartel regulation in a form 
to be determined "by experience". 

The whole trend of the argument of this Part of the Report [on international 
trade policy] is towards a management of international trade, in place of leaving 
it to unregulated competition. That is to say, it is towards that for which the 
cartels stand. To attempt to destroy or stop cartelization would, therefore, be a 
contradiction of policy. But it is equally essential that, whatever policy in regard 
to international trade is adopted by the Government of Britain, that policy should 
not be liable to defeat or deflexion by the extra-governmental decisions of cartels. 
The latter should act in accord with national policy and as agents of that policy, 
not in disregard of that policy. [At this point Sir William advocates the registra- 

• 39 • 

Controlling World Trade 

proval or rejection, under standards of varying severity, of 
plans for market control put forward by business groups. 
One country could approve or reject the proposals of its 
nationals for cartel participation; or a group of countries 
might agree to apply common standards. 

In the United States, various groups have proposed a pro- 
cedure of advance clearance by an administrative agency 
of plans for American firms' participation in international 
business agreements, and have suggested certain standards 
that such an agency might use in accepting or rejecting the 
plans. Both procedure and standards are discussed and re- 
jected in the next chapter. In Britain certain industrial groups 
have come out strongly for international cartel agreements 
under proper supervision. A Coalition Government "White 
Paper" on employment policy pointed, less clearly, in the 
same direction.^ Although anticartel voices are not lacking in 

tion of cartel agreements but advises that this is not sufficient.] What is wanted is 
that those who have the responsibility of conducting great and highly organized 
industries should come to regard themselves as the agents of a wider policy than 
that of their business. Just under what forms and by what institutions this can be 
best accomplished can probably be learned only by experience. 

It is the author's view that the agents of public policy should be public 
officials rather than cartel executives, and that if public policy is really going to 
take the form of export restriction and price stabilization in particular in- 
dustries, it had better be by intergovernmental agreement rather than by cartel 
arrangement. This probably implies, for manufactured products, government 
export and import monopolies. 

1 The World Trade Alliance, which has disseminated its views widely by pam- 
phlet, has been the most vociferous exponent for world cartelization under super- 
vision, but there is no reason to take the views of the Alliance seriously. 

The Federation of British Industries has gone on record as favoring interna- 
tional cartels in the postwar world, in a number of publications. Among them 
are Reconstruction: A Report by the Federation of British Industries, and International 
Trade Policy, a report by the F.B.I. International Trade Policy Committee. 

A privately circulated report by a subcommittee of the Conservative Party's 
Central Committee on Post- War Problems, entitled. Work: The Future of British 
Industry, favors a full report, by any British firm entering a cartel agreement, on 
the terms of the agreement, to insure that it does not conflict with commercial 
policy. This report, which is entitled to serious consideration as representing 
Conservative Party views, is of the opinion that cartels can serve the interests of 
consumers as well as producers, if the purpose of the cartel is expansion of output. 

. 40 • 

Cartel Policy by International Agreement 

Britain, they do not ring with the strong moral conviction to 
which we in our antitrust environment are accustomed. 

To date the Labour Government has not pubHshed its 
views, if it has views, on the international cartel question. In 
fact, the Labour Party put little emphasis on either domestic 
or international cartel issues in the 1945 elections.^ The Con- 
servative Party, on the other hand, advanced a cartel policy 
and apparently, according to the London Economist, had pre- 
pared a draft bill on the subject/ It proposed the establish- 

The Liberal Party's pamphlet, Industry and the State, frowns upon monopoly, 
but it is not clear whether the Party favors competition or control in the foreign 

Apart from the unorthodox views of Herbert Morrison, the Labour Party is 
historically and profoundly indifferent to the alleged advantages of competition. 

The subject of cartels was unilluminatingly debated in the House of Lords on 
Jan. 25, 1944, on which occasion Lord Woolton, replying for the Government, 
promised that the Government's views on the subject would be clarified in the 
forthcoming White Paper on employment policy. 

The White Paper duly appeared on May 26, 1944, with a perfunctory state- 
ment on monopoly and a vague promise that the government would "seek 
power to inform themselves of the extent and effect of restrictive agreements, and 
of the activities of combines; and to take appropriate action to check practices 
which may bring advantages to sectional producing interests but work to the 
detriment of the country as a whole." 

The debate on the White Paper in the House of Commons, June 21-23, and 
in the House of Lords on July 5-6, 1944, made it clear that the only group with a 
policy were the proponents of cartel arrangements under government super- 
vision. The debate was distinguished by Lord McGowan's lament that compre- 
hensive international cartel arrangements would probably not be practicable for 
a few years after the war. "Unless German and Japanese goods," said His Lord- 
ship, "are excluded from world commerce — and that is not a practicable proposal 
for more than a few years perhaps — the only alternative available at the moment 
is a regime of bitter international competition . . ." 

At the International Chamber of Commerce meeting at Rye, N. Y., a British 
delegate. Sir Clive Baillieu, is reported to have depicted cartels as "not all 
white or all black," and to have favored full publicity and government regulation 
of cartels. There is every indication that Sir Clive was correctly reporting the 
dominant British attitude. 

^ The participation of representatives of the British government in the pro- 
posals concerning restrictive business practices published by the U.S. Depart- 
ment of State, November, 1945, is discussed in Sec. E of this chapter. 
2 June 30, 1945. 

• 41 • 

Control ling World Trade 

ment of an independent tribunal, without powers of en- 
forcement, to publish the results of investigations into cases of 
alleged malpractice brought before it by the Board of Trade. 
"A malpractice is evidently to be defined as anything that in- 
jures the consumer or prejudices the export trade." We may 
accept the Economisfs description of this proposal as "milk- 
and-watery" regulation indeed. No registration of proposed 
business agreements would be required; the Board of Trade 
has only limited investigatory powers; and a malpractice, if 
accidentally discovered, would receive no more serious rebuke 
than that involved in publicizing it. 

Neither in England nor the United States do the principal 
proponents of cartel regulation go further than to suggest the 
approval or rejection by individual governments of plans for 
international business cooperation. This might be carried a 
step further by international agreement on the standards 
governing approval or rejection, and still further by trans- 
ferring the authorization or rejection of plans to an inter- 
national body representing the participating governments. 
Such an international cartel policy might be adopted by 
countries with similar export interests or, as is suggested in 
Part II, with reference to commodity agreements, by all the 
nations engaged in foreign trade represented in the United 
Nations. In the absence of positive proposals and with the 
possible variations numerous, the whole subject of cartel regu- 
lation is so highly speculative that it seems hardly w^orth while 
to attempt to discuss its ramifications. Two comments, how- 
ever, need to be made before we offer recommendations 
for an intergovernmental cartel program. 

1. In Chap. Ill the proposal for advance approval by a 
government agency of American firms' participation in inter- 
national business agreements is rejected principally on the 
grounds {a) that even with complete disclosure it is im- 
possible for officials to appraise in advance the effects of a 
particular scheme of regulation on competitive conditions and 
{b) that, in fact, disclosure is never likely to be complete. If 

-.42 • 

Cartel Policy by International Agreement 

an international agency, representing all trading nations, were 
established to clear proposed business agreements, it is prob- 
able that disclosure would be much less complete and that 
officials charged with the task of approving or rejecting plans 
would be even less competent to judge their probable effects. 
There is the further probability that an international or- 
ganization representing countries that import as well as export 
manufactured goods would have great difficulty devising 
standards to distinguish permissible from prohibited agree- 
ments. It is altogether a simpler problem, though difficult 
enough, to deal with a relatively homogeneous primary 
product than with the output of a manufacturing industry. 

2. Regulation of cartels by countries having similar export 
interests could hardly mean anything less than approval of 
cartel agreements — with or without a considerable degree of 
government control — as a device for stabilizing the market 
within the cartel area and for increasing prices on exports from 
the area. To stabilize markets, however, would hardly be 
possible if outside competitors were free to send their surpluses 
into the area, so that common action to exclude competitors 
might be necessary. If outside com^petitors continually under- 
cut prices on exports from the area, it would also be ex- 
tremely difficult to maximize the bargaining advantages of 
the group in trade with third countries. In such cases it might 
be necessary to undertake bilateral trading arrangements for 
the purchase of raw materials from third countries on condition 
that these countries purchase raw materials from the group. 

Regional cartel arrangements of this sort would hardly be 
set in motion except as part of a broader commercial policy 
agreement. As such, cartel arrangements would open up 
possibilities for trade discrimination and economic warfare of 
the most disruptive kind. Something like this was fore- 
shadowed by the agreement at Diisseldorf in 1939, in which 
representatives of the Federation of British Industries and the 
Deutsche Industrie Verband agreed to seek the assistance of 
their respective governments against other countries (clearly 

. 43 • 

Controlling World Trade 

the United States) who might refuse to cooperate with the in- 
ternational industrial agreements there prepared/ It was ap- 
parently the intent of the industrialists assembled at Diissel- 
dorf that government participation in cartel regulation should 
be limited to coercing outsiders into agreement and to policing 
the agreement once made. 


Although international cartels do not constitute the most 
important trade barrier, they have definitely impeded the 
flow of goods in international trade and narrowed the area of 
competitive private trading. Whatever stabilizing influence 
cartels have exerted has been in the direction of prices and 
profits and away from production and employment. The 
eff'ect of cartel practices on international trade has become 
sufficiently pervasive to be a matter of public concern. The 
alternatives confronting public policy are, on the one hand, 
some type of regulation or some form of antitrust procedure 
and, on the other, policy by international agreement versus 
local policies affecting the participation of nationals in cartel 

It has been argued above that apart from special cases re- 
quiring intergovernmental regulation of the ffow of manu- 
factured products in international trade for security or a few 
other reasons, any broad-scale regulation of cartels is likely 
either to be inadequate or impracticable. A clearance of pro- 
posed business plans by international agreement is inade- 
quate; regulation that substitutes the judgment of govern- 
ment officials for that of private traders in manufacturing 
industries is impracticable when these traders must still bear 
the responsibility of loss. Whether, if industrial facilities were 
government owned, control by international agreement 
would in certain cases be advisable, is a question that, under 
the circumstances, does not have to be answered. 

1 This agreement is discussed at greater length in Chap. IV. 

. 44 . 

Cartel Policy by International Agreement 

It has been steadily emphasized that unless positive meas- 
ures are undertaken to provide jobs elsewhere for workers 
now employed in war-expanded industries and, where essential, 
to scrap or hold out of production excess facilities, the pres- 
sure for cartelization will be great. It is on the assumption 
that conditions favorable to the expansion of domestic em- 
ployment and multilateral trade are forthcoming that a 
program for curbing cartel practices is proposed. Under these 
conditions, proponents of an effective international program 
of business restrictions on foreign trade would have to wrestle 
with four main problems: 

1. What business agreements in foreign trade should be 
considered to fall within the program; what terms of these 
agreements should be dealt with; and how? 

2. How can the advantages of international exchange of 
industrial techniques be preserved and the restriction to 
competition customarily involved in such exchange be offset? 

3. How can the large international combine, which can be 
as restrictive of trade as a cartel agreement, be regulated? 

4. What type of international machinery is adapted to an 
effective curbing of cartel practices? 

It is unlikely that a workable solution can be found for all 
these problems or, if found, that it can be made acceptable to 
all governments concerned. It is tempting, but fruitless, to 
try to close all loopholes, regardless of administrative diffi- 
culties or the pressure of important special interests. The 
adequacy of any program should be judged by the more 
modest test of whether it substantially frees foreign trade, 
while providing the machinery for concerted action where 
such action is demonstrably desirable. 

What is contemplated is an international convention where- 
by the signatory nations would agree to take recommended 
action with respect to the participation of their nationals in 
international business agreements and combines, and also to 
handle problems of postwar economic dislocations and ex- 
change shortages by means other than cartel arrangements. 

• 45 • 

Controlling World Trade 

What might be involved in such a convention can best be dis- 
cussed under the problem headings suggested above. 

Business Agreements Included, and Inter- 
national Action Recommended 

The proposals suggested below are intended to apply to 
those restrictive business agreements that are either dependent 
upon or not dependent upon an exchange of patents and 
processes knowledge. The first type, involving the possi- 
bilities of freer exchange of industrial technology by inter- 
governmental agreement, will be discussed in the next chapter. 

The cartel agreement achieves its restrictive effect chiefly 
through six practices: (1) terms providing for the fixing of 
prices, including discounts and premiums; (2) division of 
export markets among participants, through assigning either 
exclusive market areas or market quotas; (3) charging of 
penalties or granting of rebates for exceeding or falling short of 
assigned quotas; (4) refusal to do business with certain classes 
of enterprise or through certain channels of trade; (5) sup- 
pression of technology; (6) systematic price discrimination as 
between markets in which the competition of outsiders is 
greater or less. Many other terms may be written into the 
agreement, but they are usually of less, or negligible, effect on 
the organization and functioning of the cartel market. It 
must be remembered that in cartels whose market controls are 
not vested in patents or trademarks, the governments of the 
participating nationals frequently play a considerable role. 
In fact, as we have said, such cartels tend to break down rather 
easily without government support. 

Any program for curbing cartels must deal with the practices 
mentioned above. Two questions then arise: should export 
and import associations be included within the meaning of 
international business agreement? Should restrictive practices 
be prohibited outright, or only those practices that are "un- 
reasonably" restrictive? 

• 46 • 

Cartel Policy by International Agreement 

Export and import associations frequently limit competition 
among their members precisely as do cartels whose participants 
are domiciled in different countries. Excluding such associa- 
tions from the coverage of an international agreement would 
definitely weaken the effectiveness of its international cartel 
provisions. Foreign firms could participate in these associa- 
tions through their subsidiaries; such arrangements might in 
some cases approximate an overtly international restrictive 
agreement. Finally, the influence in world trade of a British 
or American export or import association may be equal to that 
of a cartel embracing a number of smaller countries. Conse- 
quently, it can be argued that if the larger countries keep 
their associations, the smaller ones must be permitted inter- 
national cartels. 

It seems to the author impractical, however, to attempt to 
treat import and export associations as cartels. In most 
countries outside the United States, there is no legal distinction 
between domestic self-regulating associations and export 
associations. Customarily, both are legal, and there is no 
antitrust machinery for overseeing or dissolving them. 
Furthermore, given a group of firms producing for both the 
domestic and foreign markets, an association for regulating 
competition at home would almost automatically imply 
limitation of competition among members on sales or pur- 
chases abroad. In the circumstances, an international anti- 
cartel policy that attempted to curb import and export associa- 
tions might be effective in the United States, but hardly 
abroad. If we want to accomplish this result, unilateral action 
directed against our own associations is preferable to action 
through an international agreement.^ The probable develop- 
ment of state trading in the postwar world strengthens the 
argument for export and import associations as bargaining 
instruments. Whatever the economic merits of this argument, 
it is unlikely that state trading can increase on a large scale 

1 American policy toward export associations is discussed in the following 

• 47 • 

Controlling World Trade 

without making the organization of importers and exporters in 
nonstate- trading countries poUtically inevitable. 

Assuming, then, that an international anticartel policy 
should cover only business agreements among firms domiciled 
in different countries, shall designated practices be regarded 
prohibited as defined, or only when they unreasonably restrain 
international trade? If agreement can be reached among 
governments that certain cartel restrictions are per se un- 
reasonable, it is definitely better to prohibit as defined; but 
difficulties of definition are such that an over-all prohibition 
of unreasonable restraints is probably the only basis that can 
be used. This leaves the difficult problem of differences of 
interpretation in different jurisdictions of what is, in any case, 
a highly ambiguous concept. In this country the courts appear 
to be definitely broadening the scope of what they are disposed 
to consider restraints unreasonable per se.'^ In England, on 
the other hand, it is rare that any consideration of the public 
interest as distinct from the interests of the contracting parties 
is undertaken in determining the reasonableness of a contract 
restraining trade. 

Different countries would consequently treat their com- 
mitments under such a proposed convention differently. In 
general, the United States would be found to hold its nationals 
to a much more rigorous interpretation of what constitutes an 
unreasonable restraint of international trade than would most 
other countries. However, since in the absence of agreement 
the differences in national policy would probably be even 
more extreme, there is still a strong argument for multilateral 
agreement. Through intergovernmental discussion a more 
uniform view of what constitutes an unreasonable restraint of 
international trade may emerge. Greater unanimity should 
develop if, as is suggested below, the proposed international 
convention on cartel policy established a permanent agency 
for evaluating international business arrangements and making 
policy recommendations to participating governments. 

^Cf., in particular, U. S. v. Socony-Vacuum Oil Co., 310 U.S. 150. 

• 48 • 

Cartel Policy by International Agreement 

What is suggested for inclusion in an international cartel 
convention is a general prohibition of provisions that un- 
reasonably restrain international trade and an undertaking by 
the participating governments to enforce this prohibition as 
against their nationals. For terms that tend to be predomi- 
nantly and significantly restrictive, the prohibition, if it can 
be adequately defined, should be against the practice as de- 
fined. When possible, the presumption should be that the 
prohibited practice is unreasonable per se. 

International Patents and Processes Agreements 

American participation in international business agreements 
restricting foreign trade has been based predominantly on the 
exchange of patents and processes knowledge. Probably nine- 
tenths of the international cartels of which American firms 
were members have taken this form/ Although the U.S. 
Department of Justice, in Congressional hearings and else- 
where, has minimized the importance of international ex- 
change of technology and has emphasized the restrictions on 
production and sales imposed in patents and processes agree- 
ments, there is no doubt in the author's mind that this tech- 
nological interchange has been of great public value. More- 
over, at this stage of the development of synthetic products — 
oil, rubber, plastics, textiles and others — it is highly desirable 
to have as full and free an interchange of research results and 
processing knowledge as is possible. 

There can be little doubt that the potential advantages of 

1 A list of 26 antitrust suits against American firms participating in inter- 
national cartels is given in Berge's Cartels: Challenge to a Free World, pp. 252-254. 
Of the 26 agreements, 18 are clearly based on patent exchanges; in most of the 
others, patent controls played some part in the system of restraints involved in 
the agreements. 

Cf.y Hearings before a Subcommittee of the Committee on Military Affairs, 
U.S. Senate, 78th Congress, 1st Session, 1943, Part II, Analytical and Technical 
Supplement, pp. 5, 6. The report of this committee, henceforth called the Kil- 
gore Committee, lists 63 American companies reported as having, in 1937, 
agreements with I. G. Farbenindustrie. All these were basically patents and 
technical data agreements. 

. 49 . 

Controlling World Trade 

international exchange of technical knowledge far exceed 
their actual realization. Patents and techniques have been 
acquired from abroad with serious limitations on their use; 
American processes and patents have been sold and licensed 
abroad under similar limitations. When technical knowledge 
has been pooled or cross-licensed under our international 
patents and processes agreements, the monopoly povx^er of 
the participating firms is also pooled. A suppression of com- 
peting processes and an extensive allocation of world markets 
then becomes possible. 

All the restrictive devices involved in the licensing and 
cross-licensing of patents are present in the domestic market, 
so that the whole problem of how technology may best be ex- 
ploited in the public interest is more a domestic than an inter- 
national issue. The need for domestic patent reform, dis- 
cussed briefly in the next chapter, does not, however, preclude 
an attempt to establish by international agreement certain 
standards of reasonableness applicable to the business ex- 
change of patents and processing knowledge that the parti- 
cipating governments might undertake to enforce. Inter- 
national agreement in this area may have to face exceptional 
difficulties, but there are still certain ways in which a freer 
interchange of technology may be promoted by international 

A first step might be to establish, by international agreement, 
machinery for the compilation and dissemination, to par- 
ticipating governments, of information concerning the scope 
and character of international patents and processes agree- 
ments, leaving to individual governments the right to take 
such measures as are deemed advisable in view of the facts 
disclosed. A second step might involve the development 
and expansion of governmentally directed industrial research 
institutions with provision for the international interchange 
of research findings.^ 

1 Something like this, limited to a particular field, is foreshadowed by the pro- 
posal, accepted at a meeting of foreign ministers in Moscow, December, 1 945 

• 50 • 

• Cartel Policy by International Agreement 

Awareness of the scope and character of international pat- 
ents and processes agreements in which American firms have 
participated is of very recent origin and has been developed 
almost exclusively through the numerous antitrust suits 
instituted since 1940 against American participants in such 
agreements. This knowledge, furthermore, is and must re- 
main incomplete, pending the interchange by governments of 
information available in the different jurisdictions. Enough 
is known, however, to indicate the nature and extensive in- 
fluence of the restraints on international trade. 

Most common and by far the most important type of 
restriction is the assignment of exclusive rights of production 
and sale in certain areas, and of quotas, to the participants in 
areas exploited together. In the U. S. Department of Justice 
complaint against Imperial Chemical Industries, du Pont 
and others, it was charged that du Pont was assigned as its 
exclusive territory the United States and Central America, 
and that I CI agreed not to export into this territory without 
du Pont's consent. Similarly, ICI is said to have been given 
the British Empire, excepting Canada and Newfoundland, 
as its exclusive territory, and that du Pont agreed not to 
export into this area without ICFs consent. It was charged 
That the defendants agree to eliminate competition between them- 
selves in non-exclusive territory by entering into various special 
contracts, agreements, arrangements and understandings, including 
the formation and maintenance of joint companies to sell the prod- 
ucts of the defendants in accordance with agreed upon quotas 
and prices.^ 

Although only competition between du Pont and ICI was 
affected by a particular agreement, both ICI and du Pont 
had separately entered into agreements with other firms in 
the chemical industry, including I. G. Farbenindustrie. The 

for a Commission for the Control of Atomic Energy. Among other duties the 
Commission would make specific proposals "for extending between all nations 
the exchange of basic scientific information for peaceful needs." Cf., The New 
Tork Times, Dec. 28, 1945. 

1 Complaint filed Jan. 6, 1944, Southern District of New York, p. 11. 

• 51 • 

Controlling World Trade 

whole series of agreements would have to be interpreted re= 
lationally before it would be possible to develop a clear pic= 
ture of the extent and character of the control of world trade 
in chemical products. International machinery for the ex- 
change of information would greatly facilitate an understand- 
ing of this control. 

Another common restriction in international patent and 
processes agreements is a limitation on the use of the acquired 
techniques. The comprehensive set of use restrictions in the 
agreement between I. G. Farben and Standard Oil of New 
Jersey has been discussed chiefly in connection with American 
security interests and is consequently considered in that con- 
text in Chap. IV. Less frequently, restrictions are put on 
quantities produced and prices charged by patent licensees. 
The same limitations, including provisions for licensing all 
future patents, are encountered in a more extensive and im- 
portant form in the interchange of patents and processing 
knowledge among domestic firms. 

This is equally true of the limiting of competition through 
the pooling of competitive patents, of which there are some 
striking examples in international patents and processes 
agreements. In the U. S. Department of Justice complaint 
against the National Lead Company and others, for instance, 
it is charged that a pooling of competitive patents for the 
production of titanium — a source of superior pigments for 
paint — eff'ectively destroyed competition in world markets 
and in the United States/ 

1 Complaint filed June 24, 1944, Southern Disti'ict of New York, p. 7, "In 
addition to acquiring all patents covering the Barton and Rossi process, the 
Jebsen process, the Auergesellchaft process in ail countries, and the U.S. patents 
covering the Blumenfeld process, the Allied companies have taken out and 
purchased numerous patents relating to the manufacture and sale of titanium 
compounds, and throughout the period covered by the conspiracy have owned 
substantially all patents of commercial importance relating to the manufacture 
and sale of such compounds, and by pooling such patents have possessed the 
power, by concerted action, to prevent persons, other than themselves, from en- 
gaging in the manufacture and sale of titanium compounds in the United 

• 52 • 

Cartel Policy by International Agreement 

Any acquisition of exclusive patent rights or of exclusive 
rights in technical know-how tends to increase the market 
control of the acquiring firm. When the firms are large rela- 
tive to the world market, as are du Pont and Imperial Chem- 
icals, a patents and processes agreement may give them a 
dominant position in world markets. A modification, by 
domestic patent legislation in different countries, of the rights 
conveyed in such an exchange may weaken this position and 
open the road to a partial acquisition by competing firms of 
techniques covered by the agreement. There is little likeli- 
hood, however, when two firms have pooled their research facil- 
ities and results as closely as have du Pont and I CI, that 
substantial competition can be restored between them by any 
sort of governmental action, national or international. Public 
policy is pretty much faced with a choice of accepting, along 
with the technological interchange, a substantial diminution 
of competition, or of attempting to preserve competition by 
denying the right to exchange technology. It is the author's 
view that the advantages of the interchange heavily outweigh 
the unavoidable restraints involved. 

A series of restraints, however, is probably avoidable. An 
international agreement for the exchange of information 
among governments on the scope and character of patents 
and processes arrangements in which their nationals par- 
ticipate would require member governments to take 
remedial action by patent and antitrust legislation and 

A further measure to promote the exchange of industrial 
technology among countries, and yet free it from privately 
imposed restraints, deserves consideration. It seems probable 
that government-supported research, already extensive in 
certain areas, will be considerably expanded in the postwar 
period. Research in agricultural technology has been almost 
completely socialized and institutionalized in the United 
States and in many other countries. The findings of the 
U. S. Department of Agriculture and of the Agricultural Ex- 

• 53 • 

Controlling World Trade 

periment Stations are actively disseminated through the 
Agricultural Extension Service. 

The small agricultural production unit obviously requires 
that if research in new technology be carried on it be done by 
the state. Although the unit size is generally quite different 
in industry, it seems probable that there are fields of industrial 
technology in which good results could be secured by govern- 
ment action. Drugs and pharmaceuticals would appear to be 
one such area. Patentable results could be made available to all 
potential users either on a royalty basis or royalty free. The 
magnificent results accomplished by the Office of Scientific 
Research and Development and its affiliates in technical re- 
search on devices of use to the military give some indication 
of the potentialities of government-supported and disseminated 
technological research. 

The full and free exchange of technical findings of military 
significance among various of the United Nations also fore- 
shadows what might be accomplished in peacetime by an 
international exchange in the field of industrial technology. 
The development of radar, penicillin, jet propulsion, atomic 
energy and a host of other items, of a significance by no 
means wholly military, was enormously facilitated by inter- 
national pooling of research results. 

The coming of peace has, of course, substantially altered 
the terms on which intergovernmental exchange of tech- 
nological discoveries can take place. Considerations of com- 
petitive advantage now impinge, but these need not create 
insuperable obstacles. Industrial research in Russia is already 
state-controlled, and it seems probable that the extensive 
socialization in prospect in many European countries will 
carry with it a considerable expansion of state-controlled 
technical research. Technological obsolescence has already 
occasioned serious concern in industrial Britain, and among 
the various proposed remedies is a greater utilization of 
government-owned and operated research facilities. 

If industrial research is extensively underwritten by gov- 

• 54 • 

Cartel Policy by International Agreement 

ernments, provision for the intergovernmental exchange of 
results becomes even more desirable. Such an exchange 
might, of course, be accompanied by the same kind of re- 
striction that has characterized international business agree- 
ments. One country, for example, might transfer technical 
know-how to another only on condition that it not be used 
in export trade. ^ No doubt considerations of national ad- 
vantage would govern the terms on which technology is ex- 
changed, just as they govern the action of states over the whole 
range of commercial policy decisions. Since, however, a 
wider range of interests would be involved in such exchanges 
than in agreements among competing producers, the terms of 
exchange might conceivably be much less restrictive. Cer- 
tainly, a government acquiring patents and technical data 
from abroad would hardly be interested in restricting their 
use in the domestic market. 

If is recommended, therefore, with respect to the inter- 
national exchange of technology, that the proposed cartel 
convention include provisions for (1) an interchange of in- 
formation among governments concerning the structure and 
functioning of international patents and processes agreements 
in which their nationals participate and (2) an interchange 
of the results of government-controlled research in industrial 
technology, with a minimum of restriction on use and area 
of exploitation. 

International Combines 

The production of goods and their circulation in inter- 
national trade can, of course, be monopolized and restrained 
by a single large firm or a combine as well as by agreement 
among competing producers. Nearly the whole of the world's 

1 It is curious, but appears to be a fact, that in technical-assistance agreements 
between private firms and Russian government trusts, terms are included that 
prohibit not only Russian exports to the area normally served by the private 
firm but also exports from the firm in question to Russia. The latter provision 
can only mean that the Russians serve notice not to purchase from the firm with 
which the agreement is signed. 

• 55 • 

Controlling World Trade 

supply of nickel, outside Russia, is controlled by Inter- 
national Nickel through its ownership of the great Canadian 
deposits. Climax Molybdenum of Colorado produces 95 
per cent of the world's output of molybdenum. 

A shift from the cartel form to the combine is illustrated 
by what happened to the control of platinum metals in the 
middle 1930's. Before that, producing interests in South Africa, 
Russia, Canada and Venezuela had united in an interna- 
tional cartel that controlled world prices and established out- 
put quotas. About 1935, International Nickel's production 
of platinum metals as by-products became so large that the 
Canadian company dominated world markets. As the prices 
charged by International Nickel set the scale for producers 
elsewhere, the cartel was forced to dissolve. 

In a combine a group of companies is organized in a 
relationship of parent and subsidiaries, or affiliates. It be- 
comes an international combine if the parent and sub- 
sidiaries, or the affiliates, are domiciled in different countries. 
However, the degree of control of parent over subsidiary or 
the extent of common action implied by affiliation exhibits 
so wide a range of variation that to determine whether a 
particular group of companies constitutes a combine, as 
defined, is frequently extremely difficult. 

Domestic antitrust policy, although it recognizes the large 
firm or combine as well as the agreement among competitors 
as a source of monopoly power, has not been conspicuously 
successful in dealing with the former. A certain inconsistency 
has long been evident in the application of antitrust policy 
to these difi'erent forms of potential restraint. With respect 
to the large firm or combine, the doctrine that size itself is 
no proof of restraint or monopoly of trade has tended to be 
the rule. With respect to agreements, on the other hand — at 
least agreements for fixing prices — interpretation has been 
much more stringent. 

This inconsistency, in part, has been due to the fact that 
the monopoly eff'ects of the large firm or combine are less 

• 56 • 

Cartel Policy by International Agreement 

easily perceived while in agreements among competitors 
these effects can frequently be inferred from the terms of the 
agreement itself. In international combines, the obstacles in 
the way of tracing the relationship between parent and sub- 
sidiary, and of affiliates, operating in different national juris- 
dictions, are much greater; and to these difficulties must be 
added the secrecy legislation of various countries. Switzer- 
land, a prime example, has by virtue of its protective laws 
attracted the central control units of a number of international 

For these and other reasons, it seems improbable that inter- 
national agreement can be reached on a program that will 
eliminate the monopoly effects of international combines or 
bring them under comprehensive control. Even if — and it 
is by no means certain — International Nickel by reason of 
its dominant position in world markets has charged higher 
prices and produced less than it would have under more com- 
petitive conditions, the Canadian government would probably 
not be influenced to do anything about it. This is not to 
say, however, that nothing can be done about international 
combines or that, in the absence of comprehensive action, 
an international anticartel program would be useless. 

Possibilities for control of world trade in a particular prod- 
uct by a single firm or combine would appear to be limited 
to a very few primary products and to patented articles or 
goods produced by patented processes. The development 
of synthetic substitutes, furthermore, is continually encroaching 
upon monopolies of the first group. Synthetic nitrogen long 
ago destroyed the monopoly position held by the Chilean 

1 It has been suggested that this problem of "international Delaware corpora- 
tions" might be handled by denying, to firms incorporated in countries in which 
they do no substantial business, access to the markets of signatory powers. Such 
incorporation, however, is frequently for legitimate purposes. For example, be- 
cause of local inadequacies, the China Trade Act permits firms doing their 
principal business in China to incorporate outside the country. Likewise, the 
legitimate avoidance of discriminatory tax laws is sometimes the reason for in- 
corporation in jurisdictions other than the one in which the firm does its principal 

• 57 • 

Controlling World Trade 

producers of the natural product. Atabrine (synthetic qui- 
nine) is a fairly effective substitute for monopolized natural 
quinine. As for patented articles and processes, if control by 
a combine in world markets substantially exceeds that granted 
by patent rights, it is usually because of restrictions agreed 
to by the combine and its normal competitors. 

The cross-licensing of competitive patents may, as explained 
in the previous section, substantially increase the monopoly 
power of participating firms. If the participants are large 
international combines, such as du Pont, I. G. Farben or 
Imperial Chemicals, the restraints to trade may be important. 
It is doubtful whether, except in a few basic materials, inter- 
national combines could or would exert a substantial control 
of world trade outside the framework of cartel arrangements 
and patent rights. 

If this judgment is sound, it follows that an international 
anticartel program might accomplish a substantial freeing of 
international trade even though combine activities were not 
brought under control. Certain positive measures, however, 
might be directed against combines by international agree- 

The interrelation of business units domiciled in different 
countries is difficult to trace, and ignorance of these relation- 
ships often handicapped the enforcement of wartime security 
measures. German control of the American licensee of beryl- 
lium patents, for example, was unknown to this government 
until shortly before the war. The implementing of blockade, 
censorship and other acts of economic warfare is immeasur- 
ably weakened by lack of knowledge of international sub- 
sidiary and affiliate relationships. Although this information 
could be assured in part by domestic legislation requiring 
federal incorporation of businesses engaged in foreign trade, 
adequate disclosure of international combine ramifications 
could probably not be guaranteed unless the several countries 
agreed to pool the information available to each. 

If, furthermore, an international agency for the study of 

• 58 • 

Cartel Policy bj> International Agreement 

business practices is actually established, one of its tasks should 
be the examination of the structure and practices of inter- 
national combines, with a view to preparing recommendations 
for action by the signatory powers. 

Finally, one form of international combine that is likely to 
develop if effective measures are taken against cartels is a 
jointly owned subsidiary established by former cartel partici- 
pants for the exploitation of third-country markets. Instead of 
apportioning these markets by the assignment of quotas, 
competition could be eliminated by sales through a common 
subsidiary. Should the ownership of subsidiaries by com- 
petitors domiciled in different countries not be forbidden out- 
right, machinery should at least be provided for the relief of 
countries adversely affected by such operations. 

What is suggested, therefore, as a minimum, is the inclusion 
in an international cartel convention of provisions for (1) the 
registration and reciprocal disclosure of information on the 
foreign subsidiary and affiliate relationships of nationals of the 
signatory countries, (2) the study by an international agency of 
the effects on foreign trade of the relationship disclosed and 
(3) action by the signatory governments against participation 
by their nationals in jointly owned subsidiaries when the effect 
is to eliminate competition in third-country markets. 

International Machinery 

Certain weaknesses show up at once in the program sketched 
above for cartel limitation by international agreement: 

1 . The enforcement of prohibitions against their nationals' 
participation in certain types of cartel agreement is left to the 
individual countries. It may be predicted with certainty that 
enforcement will vary markedly as between countries. To the 
extent that the practice to be prohibited can be so defined 
that evidence of an agreement is evidence of the offense, diver- 
gence in enforcement may not be great. But when the test, 
as it m.ust be in most cases, is whether a business association is 
acting in such a way as unreasonably to restrain trade, differ- 

• 59 • 

Controlling World Trade 

ences in judicial tradition and in public attitudes will inevit- 
ably lead certain jurisdictions to approve of practices dis- 
approved by others/ 

2. Omission of any adequate measures for the control of 
combines must lead to the supposition that, if certain market 
results become inpracticable by the cartel route, the combine 
method will be chosen. It should, however, be pointed out that 
(1) there are some rather formidable obstacles to the forma- 
tion of ownership groups, particularly across national bound- 
aries and (2) one of the more obvious combine routes, the 
establishment of jointly owned subsidiaries in third countries, 
is to be prohibited. 

3. The failure to apply to export and import associations 
the prohibitions applied to international cartels may offer 
avenues of evasion. How great an evasion is difficult to pre- 
dict, but it could not become very significant without a 
marked change in the nature and function of such associations. 
If and when a change became evident, the relevant provision 
in the convention might have to be altered. 

These and other weaknesses might be remedied by further 
study of international business arrangements and by continued 
discussion of standards and methods of enforcement by repre- 
sentatives of participating countries. The convention should 
therefore provide for the setting up of an international agency 

1 What is needed, manifestly, is the development of common standards of 
business practice in the field of international trade that will be uniformly en- 
forced in the various jurisdictions. Although the fact-finding and recommenda- 
tory powers of the proposed Office of International Business Practices may be 
expected to lead in that direction, its influence might be slow and uncertain. 
A somewhat radical suggestion that is, nevertheless, worthy of consideration is 
the establishment of an international quasi-judicial body to issue orders or recom- 
mendations. In a descending order of comprehensiveness the powers of such a 
tribunal might be defined as follows: (a) to issue "cease and desist" orders, en- 
forceable by the courts of the member nations, just as such orders by the Federal 
Trade Commission are enforceable by Circuit Courts of Appeal in this country; 
{b) to issue such orders in cases involving practices that have been defined by 
international agreement to be unreasonable /)^r se; (c) to issue recommendations 
on the basis of which the participating governments might bring action in their 
own courts. 

• 60 • 

Cartel Policy by International Agreement 

to ' be called, possibly, an Office of International Business 
Practices, concerned principally with studies and the prepara- 
tion of recommendations. Since cartel policy is only one part 
of the broader field of commercial policy, such an office should 
be affiliated with and subordinate to an international com- 
mercial policy organization. 

An Office of International Business Practices might con- 
ceivably have the following three main functions: 

1. To act as a repository for registration statements and 
such other information as business firms are required by inter- 
national agreement to disclose on foreign-subsidiary and 
affiliate relationships and on international business agreements. 

2. To report to the participating governments on the en- 
forcement of the cartel convention in the various countries. 

3. To study further the problem of international business 
practices and to recommend to the international commercial 
policy organization the calling of conferences to discuss changes 
in the cartel convention. 

In a field as unexplored as that of international cartels and 
combines, the establishment of what amounts to an inter- 
national research group might contribute substantially to the 
development of effective and relatively uniform standards of 
control of business arrangements in foreign trade. 


The Proposals for Expansion oj World Trade and Employment' 
published in November, 1945, by the U.S. Department of 
State look toward the reestablishment of international trade on 
a multilateral basis and contain a chapter, "Restrictive 
Business Practices," that requires comment in the light of the 
anticartel program discussed above. Since the Proposals 
followed three months of intensive discussion between techni- 

1 These Proposals were "developed by a technical staff within the Government 
of the United States, in preparation for an international conference on trade and 
employment, and presented for consideration by the peoples of the world." 

• 61 • 

Controlling World Trade 

cal experts of the British and American governments, and 
since the British government has expressed itself to be "in 
full agreement on all important points,"^ it must be supposed 
that this document represents a reconciliation or compromise 
of such differences on cartel policy as may have previously ex- 
isted between the executive branches of the two governments. 
The provisions concerning restrictive business practices are 
contained in Chap. IV of the Proposals.'^ Paragraph (1) is a 
statement of objectives that does not differ in essential respects 
from those recommended in this report. 

There should be individual and concerted efforts by members of 
the Organization [the proposed International Trade Organization] 
to curb those restrictive business practices in international trade . . . 
which have the effect of frustrating the objectives of the Organization 
to promote expansion of production and trade, equal access to 
markets and raw materials, and the maintenance in all countries of 
high levels of employment and real income. 

The qualifications in the latter part of the above sentence on 
the general statement of purposes are of little significance. 
A business practice that does not hamper "the expansion of 
production and trade," "equal access to markets," and the 
"maintenance of high levels of employment and real incom.e" 
must be judged to be generally nonrestrictive. The statement 
of objectives embraces both cartel and combine practices. 
Although from the language of Paragraph 1 it might be pre- 
sumed that export and import associations are included in the 
business agreements against which action is proposed, it is 
made clear in Paragraph 2 that only restrictions imposed by 
"a private international combination or agreement"^ are in 

The Proposals do not go nearly so far in implementing anti- 
cartel objectives as those recommended in this report. It is 

^ Joint Statement by the United States and the United Kingdom regarding the Under- 
standing Reached on Commercial Policy^ Dec. 6, 1945. 

2 The text of Chap. IV of the Proposals is given at the end of this chapter, p. 64. 
^ Italics added. 

• 62 • 

Cartel Policy by International Agreement 

not proposed that countries agree on a statement of cartel and 
combine practices to be specifically prohibited by legislation 
to be enacted in the several countries (or on a finding that they 
unreasonably restrain trade) . Rather it is recommended that 
the International Trade Organization should (1) "receive 
complaints from a member," (2) "be empowered to call upon 
any member to provide information relevant to such a com- 
plaint," (3) "make recommendations to the appropriate mem- 
bers for action in accordance with their respective laws and 
procedures," and (4) "be empowered to request reports from 
members as to their actions in implementing such recommen- 
dations, and to report thereon." 

It is the author's view that, if it could be reached, an inter- 
national agreement to attack the cartel problem by legislation 
would be a considerably more effective weapon against re- 
strictive business practices in international trade than that 
proposed by the U.S. Department of State, even if the legisla- 
tive standards and their judicial interpretation varied ap- 
preciably in the different jurisdictions. Furthermore, although 
it is recommended that the International Trade Organization 
be authorized "to conduct studies," "to make recommenda- 
tions concerning uniform national standards" and "to call 
conferences" to consider questions in the field of international 
business practices, the failure to provide for registration of 
international business agreements and the foreign holdings of 
business firms will severely limit the sources of information re- 
garding cartel and combine practices. Finally, the Proposals 
are silent on the question of the international exchange of 
technology and how it may be promoted without encountering 
trade restrictions. 

Despite these shortcomings, however, it must be recognized 
that the Proposals represent a substantial movement toward an 
anticartel policy in international trade. Whether the recom- 
mendations could have gone further it is difficult, if not im- 
possible, for an outsider to say. The support of Great Britain 
is essential to the success of any conference on international 

• 63 • 

Controlling World Trade 

trade policy, and apparently the support of Britain has been 
secured for measures looking toward the curbing rather than 
the regulation of cartels. It is always possible that, should the 
sentiment in countries participating in the World Trade Con- 
ference run strongly against restrictive cartel practices, a more 
drastic program might be adopted. 

Finally, it should be said that Paragraph 3 of the chapter, 
"Restrictive Business Practice," leaves the United States (or 
any other country) free to pursue as stringent a policy as it 
cares to against restrictive practices by its own nationals in in- 
ternational trade. Paragraph 4 looks toward a greater 
measure of cooperation among the participating countries in 
the enforcement of such corrective policies as may be pursued 
by any one country. 




Restrictive Business Practices^ 

1. Curbing of Restrictive Business Practices. There should be in- 
dividual and concerted efforts by members of the Organization to 
curb those restrictive business practices in international trade (such 
as combinations or agreements to fix prices and terms of sale, divide 
markets or territories, limit production or exports, suppress tech- 
nology or invention, exclude enterprise from particular fields, or 
boycott or discriminate against particular firms) which have the 
effect of frustrating the objectives of the Organization to promote 
expansion of production and trade, equal access to markets and 
raw materials, and the maintenance in all countries of high levels 
of employment and real income. 

2. Cooperation among Members. In order to achieve the purposes 
of Paragraph 1, the Organization should be charged with the 
furtherance of this objective. The Organization should receive 
complaints from any member (or, with the permission of the mem- 
ber, from commercial enterprises within its jurisdiction who allege 
that their interests are affected), that the objectives of the Organiza- 

iThis is Chap. IV of the Proposals. 

. 64 • ,,...-■.--.--■ 

Cartel Policy by International Agreement 

tion are being frustrated by a private international combination 
or agreement. The Organization should be empowered to call upon 
any member to provide information relevant to such a complaint; 
it should consider such data and, if warranted, make recommenda- 
tions to the appropriate members for action in accordance with their 
respective laws and procedures; it should be empowered to request 
reports from members as to their actions implementing such recom- 
mendations, and to report thereon. The Organization should also 
be authorized, within the scope of its subject matter, to conduct 
studies, to make recommendations concerning uniform national 
standards, and to call conferences of member states for purposes of 
general consultation. 

3. Continued Effectiveness of National Laws and Regulations Directed 
against Restrictive Business Practices. Any act or failure to act on the 
part of the Organization should not preclude any member from 
enforcing within its own jurisdiction any national statute or decree 
directed toward the elimination or prevention of restrictive business 
practices in international trade. 






DISCUSSION of national policy concerning the participation 
of American firms in foreign-trade agreements has cen- 
tered around four questions: (1) the proper role of export 
associations, (2) participation by American associations, 
firms, and their foreign subsidiaries and affiliates in cartel 
agreements not directly afi'ecting United States imports or the 
exports of other firms, (3) agreements between American 
and foreign firms or export associations directly afi'ecting 
American imports or the exports of other firms and (4) 
international technical data agreements. 

If a cartel policy could be formulated by international action 
along the lines indicated in Chap. II, it would allay certain 
doubts concerning the wisdom of enforcing our antitrust acts 
against American participants in international business 
agreements restraining and regulating foreign trade. Such 
action would leave export associations (and import associations 
in other countries) intact but would prohibit restrictive trade 
agreements among nationals in diff'erent countries. American 
implementation of the latter types of agreement is already at 
hand in the enforcement of our antitrust acts. We should pre- 
sumably have to make new provision for the registration of 
both international business agreements involving American 
participants and the existence or acquisition of ownership or 
affiliate interests by American firms abroad.^ In addition we 

1 If the Bretton Woods Agreement is accepted, we shall be obligated in any case 
to collect information on the foreign ownership interest of American nationals. 
See Articles of Agreement; International Monetary Fund and International Bank for 
Reconstruction and Development, United Nations Monetary and Financial Con- 
ference, Bretton Woods, N. H., July 1 to July 22, 1944, U.S. Treasury, Washing- 
ton, D.G. 1944, Article 8, Sec. 5. 

• 66 • 

American Policy Toward Business Agreements 

might be required to provide for the exchange with other 
countries of government-developed technology. The terms 
under which American firms should be allowed to acquire or 
license patents and technical know-how is mainly a domestic 
problem; and domestic policy is probably applicable, without 
significant modification, to technical data agreements be- 
tween American and foreign firms. 

However, if international agreement proves impracticable, 
we may be confronted with a new and . diff'erent set of prob- 
lems. If, for example, the quest for national security and 
economic protection leads to the formation of blocs and 
groups pursuing discriminatory policies toward American 
property and American trade, we might be forced into a kind 
of commercial imperialism foreign to our interests and tra- 
ditions. In such circumstances, American firms investing 
and trading abroad would doubtless be granted the govern- 
ment protection and assistance they seem frequently to desire, 
but under conditions which, in the long run, would not be 
conducive to the preservation of free enterprise. 

In view of the postwar power position of the United States, 
it seems unlikely that hostile measures will be taken against us 
unless we pursue policies so disruptive of world trade and so 
unresponsive to international security interests as to compel 
other countries to isolate themselves from American influence. 
A wholesale dumping of subsidized agricultural surpluses and 
uncontrolled fluctuations of employment in the United States 
might so far disorganize world trade as to invite counteraction 
of this sort. However, with anything like adequate recognition 
at home of the responsibilities inherent in our dominant eco- 
nomic and military position. United States influence in shap- 
ing the future organization of world trade should be large. 
Whether, in the face of known developments abroad, it will be 
large enough is an open question. 

It is probably wiser to project American policy toward inter- 
national business agreements on the basis of certain assump- 
tions: (1) that state import and export monopolies will be 

• 67 • 

Controlling World Trade 

both more numerous and more extensive in the postwar than 
in the prewar period ; (2) that a greater proportion of foreign 
trade will be conducted by state-supervised import and export 
associations; (3) that domestic trade in most foreign coun- 
tries, insofar as it is private, will be heavily cartelized; (4) that 
international commodity and cartel agreements among ex- 
clusively producer interests will not be completely avoided 
by an international economic organization; and (5) that 
quantitative import controls will continue to exist for a long 
time after the war. 

This seemingly pessimistic projection is not, nevertheless, 
entirely incompatible with a relatively large area of inter- 
national agreement on foreign economic policy. It is, however, 
incompatible with anything like over-all world economic plan- 
ning or over-all elimination of the barriers to free private trad- 
ing. A realistic approach, therefore, demands that we discuss 
American policy toward international business agreements 
within the framework of a world trade organization in which 
the trading units are increasingly state owned or controlled, 
and from which trade restrictions both public and private are 
by no means excluded. 


Some 125 American export associations, comprising upward 
of 2,000 firms, have been organized under the Webb-Pomerene 
law since its passage in 1918. The mortality among them has, 
however, been high, and not more than 50 continue in ex- 
istence at the present time. The recent antitrust complaint 
against the Alkali Associations and their member firms, and 
the current Federal Trade Commission investigation of the 
Phosphate Associations, have opened various export associa- 
tion activities to question. The likelihood, in fact, that 
further complaints and investigations are pending may well 
discourage the organization of new associations for foreign 
trading. At the same time, it seems probable that postwar 

• 68 • 

American Policy Toward Business Agreements 

trade conditions will make it highly desirable for export firms 
to have the advantages of such association. 

The sentiment that produced the Webb-Pomerene law 
was clearly that small American exporters were handicapped 
both in competing with foreign cartels and combines and with 
powerful American rivals, and in competing with each other 
for sales to foreign buying combinations and syndicates. The 
Federal Trade Commission argument for export associations 
was definitely a "small business" argument.^ Since 1918, the 
relative importance of the small firm in American export 
trade has markedly diminished. The size and character of 
the trading units with which our firms compete and to which 
they sell abroad have likewise changed. Today, the argu- 
ments pro and con export associations are rather diff^erent 
from those which marked Congressional debate on the Webb- 
Pomerene law. 

Although many small firms — as in the lumber and dried 
fruit industries — have been organized into export associations, 
other American associations — in copper, steel, oil and 
chemicals — have included many firms quite adequate in size 
to meet large-scale competition abroad. On the other hand, 
the kind of foreign competition that now has to be met includes 
not only cartels and combines but numerous state export 
monopolies and state-sponsored export associations. In post- 
w^ar trading, our export associations will confront buyers or- 
ganized in state import monopolies and large-scale syndicates, 
both public and private. 

The Webb-Pomerene law exempts an export association 

1 Report on Cooperation in American Export Trade, U.S. Federal Trade Com- 
mission, Government Printing Office, Washington, D. C, 1916. Cf., pp. 4-7. 
After discussing foreign cartels and combines, 

It is against such organizations as these, uniting powerful groups of foreign 
concerns, backed by great banks, aided by railway and ship lines, and assisted 
by foreign governments, that hundreds of comparatively small American manu- 
facturers and producers must compete if they engage in export trade. Moreover, 
in some industries such small manufacturers must also compete abroad with 
great American companies having most efficient world-wide selling organiza- 

• 69 • 

Controlling World Trade 

from the application of the Sherman Act, provided the activi- 
ties of such an association do not : (1 ) restrain trade within the 
United States; (2) restrain the export trade of any domestic 
competitor or association; or (3) enhance or depress prices 
within the United States, substantially lessen competition 
with the United States or otherwise restrain trade therein/ 

Enforcement of the Webb Act, within the context of the 
antitrust laws, presents some difficult and complex problems. 
No other country, so far as is known, attempts to differentiate 
legally between an association of producers limiting competi- 
tion among themselves in the domestic market and an associa- 
tion, perhaps of the same producers, limiting competition 
among themselves in export sales. In most countries, of 
course, such associations are legal both in domestic and 
foreign trade. Since the enforcement of the Act to date has 
been honored chiefly in the breach, some of the more per- 
plexing issues involved are only now coming to light. They 
are so extensively revealed in the present complaint against 
the Alkali Associations that this will probably be one of the 
most important antitrust cases in recent years. 

It is charged that competition among members of the Alkali 
Associations in the domestic market was restrained, that the 
access to foreign markets of American firms outside the associa- 
tions was restrained, and that the associations, in agreements 
with foreign firms, limited imports into the United States.^ 
All of these activities, assuming the charges to be correct, are 
clearly illegal. The complaint goes further, however, and 
calls in question the fixing of prices on export sales, agree- 
ments with foreign firms allocating markets and quotas 
in foreign territory, and price policies of the associations 
as they afi'ected export sales of independent American 

1 Wendell Berge, in a speech before the Commerce and Industry Association of 
New York, May 2, 1944, "Export Associations and the Sherman Act," gives an 
excellent interpretation of the nature of the Webb Act exemption. 

2 Complaint filed Mar. 16, 1944, Southern District of New York. 

• 70 • 

American Policy Toward Business Agreements 

Whether American firms or export associations should be 
allowed to enter into agreements with foreign firms and asso- 
ciations to limit competition in foreign markets is discussed in 
the next section. Here we are concerned primarily with 
association activities designed to limit competition among 
members on export sales. Since there has been to date no 
comprehensive adjudication under the Webb Act, it is im- 
possible to speak of its meaning with authority. It seems to 
the author, however, that if the Act means anything at all, it 
exempts export associations from the provisions of the Sher- 
man Act prohibiting agreements among firms to restrict their 
competition on foreign sales — even though they may establish 
central sales agencies, fix prices and regulate among them- 
selves other conditions of export. Since the purpose of the 
Act was to enable export associations to present a common 
front to foreign competitors and foreign buyers, not to allow 
such a self-limitation of competition would appear to defeat 
the purpose of the Act. It is upon this interpretation, there- 
fore, that the merits and demerits of export associations will 
be discussed.^ 

The power to fix prices means, of course, the power to alter 
prices, i.e., an export association may establish a price policy, 
but it could not, without violating the Act, include price 
discrimination in foreign markets for the purpose or with the 
effect of driving independent American exporters out of these 

1 If it is the contention of the government that the Webb Act frees associations 
from some of the limitations of the Sherman Act but not from others, it is hard 
to see where such a line could be drawn. The Act was, to be sure, designed to 
promote exports, but to promote them within an international market in which 
the associations' competitors and purchasers were not restrained by those anti- 
trust limitations that presumably make association of sellers in the domestic 
market unnecessary. If these competitors and purchasers are free of anti- 
trust limitations, what limitations can be maintained on the self-regulation of 
our own export associations, while remaining within the logic of the Act? The 
provision in the Act that export association activities must not "restrain the 
export trade of the United States," presents, it is true, difficulties of interpretation. 
If, however, the logic of the Act is as stated, the "export trade" in question can 
only mean the trade of firms outside the association. 

• 71 • 

Controlling World Trade 

markets. Although the enforcement of the Act against such an 
association practice might be difficult, the principle involved 
is the same as in domestic trade. 

If, as is sometimes said, a self-limitation of competition 
among exporters must of necessity restrain domestic trade and 
the trade of competitors outside the association, it might be 
argued that our paramount interest in domestic competition 
requires an elimination of export associations, even though we 
should thereby be somewhat disadvantaged in foreign markets. 
On the other hand, there are strong business pressures for an 
increase in the permitted scope of export association activities, 
despite any consequent lessening of competition in the domestic 
market. The pursuit of either objective would require a modi- 
fication of the Webb-Pomerene law, though in opposite 

The first opinion holds that business men cannot very well 
associate in order to limit competition among themselves for 
exports without their competition for domestic business being 
affected. Since the value of our exports rarely exceeds 7 or 8 
per cent of the value of our total production, it is claimed that 
any gain in exports achieved by association is apt to be heavily 
outweighed by the loss of competitive vigor in the home mar- 
ket. If all domestic producers were exporters and all export 
firms were domestic sellers, this would probably be a 
defensible argument. There may be some merit in it in any 
case, but hardly enough to justify the abolition of export 
associations. If the argument is to be taken literally, we should 
probably do well to prohibit business association even for 
"merriment" since, as Adam Smith long ago observed, such 
convocations are rarely held without detriment to competi- 
tion. Until a serious attempt is made to inspect Webb-Pome- 
rene associations, however, it is by no means clear that such 
associations cannot be held to self-limitation of competition 
in export markets. 

One suggestion for curbing export associations is to permit 
only those that are demonstrably needed to carry on effective 

• 72 • 

American Policy Toward Business Agreements 

competition with foreign cartels and combines. This proposal 
reverts to the original Webb-Pomerene arguments, but the 
organization of world trade has since substantially changed. 
The Soviet Union, which has been of little influence in world 
trade to date, appears likely, through her state trusts and pur- 
chasing missions, to be a large purchaser in world markets for 
some time to come. The postwar requirements of many other 
European countries will undoubtedly be made known by pur- 
chasing missions shopping around for the cheapest market. 
The economic reorganization of these nations, which will al- 
most certainly call for a larger measure of government 
ownership and supervision, will carry with it a corresponding 
increase in the scope of state importing and exporting monop- 

Under these circumstances it is the author's view that export 
associations, viewed solely as devices for limiting competition 
in exports among the member firms, can serve a large and use- 
ful function in promoting American export trade and should 
be encouraged; that the requirements for membership should 
not exclude any legitimate export enterprises in the industry; 
but that the associations should not be required to make their 

1 Although the U.S. Department of Justice foresees a smaller role for export 
associations and a larger area of free competition in international trade than the 
author of this report thinks probable, there has been no official suggestion from 
the Department that the scope of Webb Act associations be reduced by legisla- 

Cf. Speech by Wendell Berge, op. cit., 

I think that so long as the conditions which gave rise to the Webb Act still 
exist, the Act, if properly employed, may be useful in promoting trade within the 
special and limited domain to which the Act applies. To meet centralized buy- 
ing by centralized selling, and to stand up against the exclusionary tactics and 
monopolistic practices of well-established foreign cartels is sometimes necessary. 
Joint action by American exporters may serve to secure an equal footing in 
foreign trade in markets where combination is permitted or even encouraged. 
No doubt such retaliatory measures are wasteful as ways of organizing world 
trade, and, no doubt, we and other nations would be better advised to join hands 
in getting rid of international trade restraints, theirs and ours alike. Meanwhile, 
however, the Webb Act has a use in defending American interests in markets 
which are too often cartelized. 

• 73 • 

Controlling World Trade 

facilities available to outside firms who cannot meet the con- 
ditions of membership.^ 

To achieve these ends, no change in the Webb-Pomerene 
lav/ would appear to be necessary, but a considerable period 
of adjudication will obviously be required to establish an 
authoritative meaning of the Act. Since any modification of 
it would have to go through a similar testing process, this time 
interval, in the light of our present ignorance of the future 
structure of world trade, leads the author to oppose any 
attempt to recast our legislation on export associations now. 
When the postwar structure of world trade becomes clearer, 
v/e may have to undertake a considerable revision of both our 
conceptions of and our institutions engaged in foreign trade. 
Meanwhile, it is highly desirable that the Federal Trade Com- 
mission investigate more fully the structure and operations of 
export associations, and the Commission is, in fact, taking 
steps toward this end. 

At the same time, and with different ends in view, business 
groups are pressing for relaxation of the antitrust laws. It is 
held that (1) in order to continue selling in foreign 
markets, export associations may find it necessary to enter into 
agreements limiting competition in those markets and (2) ex- 
port associations may serve an American interest broader than 
the preservation of competition, by agreements that limit im- 
ports into the United States. Both opinions apply to business 
agreements that involve individual firms as well as export 
associations and are consequently greater in scope than the 
association activities discussed thus far. To a consideration of 
these two views we now turn. 

^Apparently, the right of an export association to exclude an outside firm from 
the use of its facilities was called in question by the Federal Trade Commission 
in the Pacific Forest Industries case (known as the plywood case) on Jan. 27, 
1940. In this case the association was required to fill any orders for export re- 
ceived by firms outside the association. An extension of this ruling would ap- 
parently permit any firms, whether regularly engaged in export or not, to utilize 
the facilities of an export association, if it existed in the industry, to fill its export 
orders. Such an interpretation seems highly undesirable. 

. 74 . 

American Policy Toward Business Agreements 


We are concerned here with business agreements entered into 
by American firms (or their subsidiaries and affiUates) and 
export associations to regulate sales in foreign territory. We 
shall postpone to the next section agreements by which the 
participants directly limit imports into the United States or 
the exports of nonparticipating American firms. Such a clear- 
cut demarcation between agreements limited and not limited 
to foreign territory is, of course, difficult to reconcile with ex- 
perience. The task of determining the extent to which an 
agreement ostensibly limited to foreign trade actually affects 
competition within the United States is extremely trouble- 
some and accounts for much ambiguity in policy recom- 
mendation. It is possible, nevertheless, to approach the 
problem by considering the various classes of foreign-trade 

American participation in market-regulating arrangements 
in foreign territory is not eflfected principally through export 
associations but by way of foreign subsidiaries and affiliates 
of American firms. As we have seen, the imposition and in- 
crease of trade barriers, by hampering exports from the United 
States, have frequently led to establishment abroad of Ameri- 
can branch plants or to negotiation of subsidiary and affiliate 
arrangements. In selling their products, these subsidiaries 
have customarily been governed by the prevailing local 
practices and so have rather frequently entered into cartel 
arrangements both domestic and international. 

As an example, consider the participation, through sub- 
sidiaries, of two of the leading American rubber companies 
in the price-fixing agreement in the British rubber industry. 
This agreement, which covers the thirteen principal producers 
of rubber products in England, including the two American- 
owned subsidiaries, fixes the whole price structure on the 
domestic sales of tires and other products. Price cutting by 
any of the participating firms would not only provoke re- 

• 75 • 

Controlling World Trade 

taliation but would endanger the price cutter's access to 
distribution channels throughout the British market. No legal 
obstacle prevents the entry of other American firms, but, if 
a new concern attempted to break into the market by under- 
selling members of the association, it would most certainly 
have hard sledding. 

Similar domestic market-regulating agreements exist not 
only in England but in many other countries and are habit- 
tually entered into by American subsidiaries domiciled in 
these countries. The oil agreement covering the sale of 
white products in Great Britain fixes quotas for the producers; 
as a party to it, the principal American firm dealing in such 
products in Britain has enjoyed a large quota/ White prod- 
ucts are distributed through privately owned filling stations, 
organized in a tight association. The individual stations have 
long-term contracts with the principal producers, so that the 
entry of a new American firm into the British market would 
depend largely on its ability to secure contracts with the exist- 
ing distributors. Any attempt to build up a new chain of 
filling stations would be met with active resistance from both 
organized producers and organized distributors. 

Sometimes sales in a foreign market are conditioned upon 
acceptance of a quota assigned by a government or by a 
government-supervised association. This type of arrangement 
is particularly frequent in the oil industry.^ Here an American 
firm's acceptance of a quota may well exclude a potential 
American competitor from the market, but it is difficult to 

^In this case the American-owned firm is an importer as well as a refiner and 
distributor. The acceptance of a quota clearly may directly affect American 
exports to Britain. 

2C/". Frederick Haussmann, "World Oil Control, Past and Future: An Al- 
ternative to 'International Cartelization' ", Social Research, Vol. IX, No. 3 
(September, 1942); D. M. Phelps, "Petroleum Regulation in South America," 
American Economic Review, Vol. XXIV, No. 1, Part 1 (March, 1939); also Hearing 
before a Subcommittee of the Committee on the Judiciary, U. S. Senate, 78th 
Congress, 2d Session, testimony of Ralph W. Gallagher, President of the Stand- 
ard Oil Company (N.J.), May 23, 1944. This subcommittee is known as the 
O'Mahoney Committee. 

• 76 • 

American Policy Toward Business Agreements 

see an alternative other than complete American withdrawal 
from the market. 

Subsidiaries and affiliates of American firms operating 
abroad have participated not only in domestic cartels but 
also in international cartel arrangements, whenever these 
have been the rule among their principal foreign competitors. 
If cartel arrangements are limited to areas in which such 
agreements are tolerated, approved or even imposed, and in 
which there are local sources of supply of the regulated com- 
modities, there seems no reason for us to object to our na- 
tionals' participation. At best, it would be difficult to exercise 
an extraterritorial jurisdiction; at worst, it would involve a 
serious interference with business practices customary abroad. 
To prevent American firms from entering such arrangements 
would adversely afi^ect our exports and foreign business in- 
terests without afi'ording foreign consumer interests any 
greater protection — assuming, of course, that we wished to. 
Nor are competitive conditions within the United States 
likely to be afi*ected to any degree by any change in policy. 
There seems, in fact, no reason to believe that foreign-trade 
agreements of this type should, or would, be held illegal under 
the antitrust acts. 

A difi'erent problem is created by American participation 
in agreements with foreign firms or associations to fix prices 
or otherwise limit competition in third-country markets or to 
divide the markets between them. In 1933, for example, the 
Phosphate Associations entered into an agreement with North 
African producers that assigned to Americans 16 per cent 
of the European market and to North Africans the remaining 
84 per cent. As a result, the American producers realized 
much higher prices on their European than on their domestic 
sales. A series of subsequent agreements brought into the 
cartel most of the phosphate producers of the world. There is 
more than a suspicion that these agreements substantially 
limited competition in the domestic market. 

The Sulphur Export Association has consummated similar 

• 77 • 

Controlling World Trade 

agreements with foreign producers, chiefly ItaHan, to regulate 
sales abroad. In this case the volume of American production 
and exports may probably be taken to indicate that sulphur 
imports into the United States would have been shght, with or 
without the agreement. In the AlkaU complaint it is charged 
that, under agreements between the American associations, 
Imperial Chemical Industries, I.G. Farben and Belgian 
Solvay, Solvay was assigned the continent of Europe — except 
for the Scandinavian countries reserved for I.G. Farben — 
and that most of the rest of the world was divided between 
the American participants and ICL^ 

Competition has sometimes been limited in third-country 
markets through establishment of jointly owned subsidiaries 
by the principal competitors. The Duperial companies, for 
example, that trade in various Latin American countries, are 
jointly owned by du Pont and I CI. International patent and 
processes agreements have been particularly prolific in pro- 
visions limiting competition in third-country markets. 

The Federal Trade Commission's view appears to be that 
participation by export associations in agreements with 
foreign interests to limit competition between them in third 
countries is permissible under the Webb Act. On the other 
hand, it is certainly the view of the Antitrust Division that 
participation in such agreements either by export firms or 
associations is illegal under the Sherman Act. The complaint 
against ICI charges that joint ownership of the Duperial 
companies, mentioned above, is a violation of the Sherman 
Act, although its effect on American domestic trade or on the 
exports of other American firms is clearly remote. This ques- 
tion of the legality of the limitation of competition in third- 
country markets, by agreement or joint ownership, is one of the 
most unclear of all issues involved in international business 

The solution could and should be sought through inter- 
national agreement on cartel policy, since nothing short of such 

1 Op. cit. 

• 78 • 

American Policy Toward Business Agreements 

agreement is likely to produce remedial action. Regardless cf 
international action, however, it should be the policy of the 
United States to prevent its nationals from entering into agree- 
ments with foreign firms or associations to limit competition 
in third countries or to divide world markets. Although such 
agreements need not inevitably limit imports into the United 
States, and thus injure domestic competition, they have a 
decided tendency to produce this effect. These agreements, 
moreover, may often adversely affect the interests of third 
countries whose markets are controlled, particularly if there 
are no local sources of supply; here we have a political if not 
an economic interest to safeguard. Finally, participation of 
American firms in such agreements is not necessary to "meet 
competition." Although the profits on exports may frequently 
be increased by such restraints, the volume of exports must be 
even more frequently diminished. Our employment interest 
in volume is distinctly more important than our profit interest 
in prices. 

In other words, a distinction needs to be made between the 
participation of American subsidiaries and affiliates in local 
cartel arrangements, such as the British rubber manufactures 
agreement, and their participation in international agree- 
ments designed, as in the Alkali Associations, to limit com- 
petition in third countries or to divide world markets. The 
former is and should be governed by the law and practices of 
the area affected; the latter may and, in the absence of inter- 
national agreement, should be prevented by our own action. 

The participation of American subsidiaries and affiliates, in 
foreign cartel arrangements may, in effect, permit the parent or 
affiliate companies in the United States — without subscribing 
to the agreement — to share in a division of world markets and 
to restrict competitive imports. It is alleged, for instance, that 
the cartel participation of Aluminum Limited of Canada, 
affiliated through common ownership with the Aluminum 
Company of America, fixes the volume of aluminum exports 
from and imports into the United States. Resort to affiliates 

. 79 . 

Controlling World Trade 

and subsidiaries will quite possibly be attempted on an even 
larger scale if we prevent our firms and associations from 
participating in international market-sharing agreements. 
Again, a better solution should be found through inter- 
national agreement on cartel policy. If this proves impractical 
we should take suitable action ourselves, though in relation- 
ships as complex as these the problem of proving cartel partici- 
pation is extremely difficult. 


The principal potential advantage to American participants 
in an international cartel is alleged to lie in the protection that 
may be afforded them in the domestic market. Foreign 
members agree not to export to the United States on condition 
that American members limit their sales abroad. Such an 
agreement, of course, affects competition in the domestic 
market directly and perhaps seriously. Furthermore, if other 
American exporters remain outside the agreement, foreign 
cartel members may insist that they either be brought into 
line or stifled. 

Preservation of competition in the domestic market, how- 
ever, is not our only national concern, and in many areas the 
United States has shown no great enthusiasm in maintaining 
competition at home. Protective tariffs have far outweighed 
cartel arrangements in the damage they have inflicted on 
domestic competition. In both our main agricultural products 
and in the labor market we have rather lightly abandoned 
competition. The coal industry has, over a period, been ex- 
empted from its rigors; the oil industry operates under 
domestic pro-rationing; competition is controlled in the 
principal milksheds; and the Sherman Act has been modified 
to permit resale price maintenance. In recent years, in fact, 
competition has taken a beating all along the line. 

It is also argued that other national interests, perhaps more 
important than domestic competition, may be forwarded by 

• 80 • 

American Policy Toward Business Agreements 

government-approved cartel participation. Foreign govern- 
ments quite obviously regard cartel participation by their 
nationals as a useful device for promoting national interests; 
why shouldn't the United States? 

Well-developed plans have been advanced recently, pro- 
posing new standards of legality for agreements in inter- 
national trade, the registration of agreements and their ad- 
vance clearance by an administrative agency. The plan sug- 
gested by the National Foreign Trade Council is the most 
comprehensive and merits particular attention.^ It proposes 
legislation that would 

1. Require registration with the agency charged with 
foreign economic policy of agreements "of a type and im- 
portance which bear upon the formulation of our foreign eco- 
nomic policy or unreasonable restraint of trade in the United 

2. Establish standards of reasonableness for business agree- 
ments in international trade different from the standards 
applied to such agreements in domestic trade. 

3. Authorize advance but revocable clearance of foreign- 
trade agreements by a designated agency, preferably the U.S. 
Department of State. 

The question of advance administrative clearance of business 

1 Memorandum on Regulatory Measures Affecting American Foreign Trade, National 
Foreign Trade Council, Inc., New York, 1 944. A very similar proposal is ad- 
vocated by Milo Perkins in an able article in Harper^ s Magazine, Vol. 189, Serial 
No. 1134, (November, 1944), entitled "Cartels: What Shall We Do About 
Them?" On pp. 576 and 577 Perkins recommends: 

(1) Registration of cartel agreements with the State Department. (2) Re- 
view (with power to approve or disapprove) of the registered agreements by an 
Interdepartmental Board chairmanned by the State Department. The enabling 
legislation establishing this Board should set up broad principles to guide it in its 
decisions as to approving or disapproving cartel arrangements. These prin- 
ciples should include consideration of: {a) our military security; {b) our foreign 
policy; {c) the effect of any agreement on the volume of our international trade; 
{d) the effect of any agreement on sales, prices, the volume and costs of produc- 
tion, and the status of labor in the industry making the application, and {e) the 
effect of the agreement on our domestic economy. (3) Review, by the Board, of 
International Commodity Agreements. 

. 81 • 

Controlling World Trade 

plans will be considered later on its own merits. Our im- 
mediate concern is to determine whether international business 
agreements are so different from domestic business agreements 
as to justify application to them of a different standard of 
legality and reasonableness. 

Insofar as foreign-trade agreements do not unreasonably 
restrain competition in the United States or limit the access 
to foreign markets of American exporters not parties to the 
agreement, a different standard is already manifest in existing 
legislation. Specifically, shall we go further and attempt to 
implement American foreign policy by international business 
agreements that do restrain domestic trade? As a corollary 
we should have to ask whether there are any American policies 
that can be better promoted by these than by any other ar- 

Without attempting to answer either question directly, the 
National Foreign Trade Council suggests a number of criteria 
for judging the reasonableness of international business agree- 

They would include, for example, the interests of national security, 
conformity with the international engagements of the United States, 
respect for the policy and laws of other nations which may govern 
or affect the particular agreement and the general objective of 
promotion of foreign trade and business of the United States in a 
manner conducive to or not inconsistent with the promotion of 
world trade and business, with due consideration to the degree of 
cooperation evidenced by the foreign nation or nations involved. 
These factors would be the basis for formulation of our national 
foreign economic policy which in turn would govern the determina- 
tion of the reasonableness of any potential or actual restraint of 
trade within the United States.^ 

Apart from the obvious difficulty of writing such standards 
into enforceable legislation, there remains the more im- 
mediate need to determine which of these interests would be 
served by international agreements — now illegal under the 

1 Op. ciL, pp. 21, 22. 

• 82 • 

American Policy Toward Business Agreements 

antitrust acts — restraining domestic trade or the access to 
foreign markets of nonsubscribing American firms. Would 
they further our interest in "security," in honoring our 
"engagements," in respecting "the policy and laws of other 
nations," or in promoting our foreign trade and business? It 
would be easy to show how various of the interests mentioned 
have been injured by international agreements restraining 
domestic trade, but difficult to produce instances in which 
they have been furthered by such agreements. Surely "respect 
for the policy and laws of other nations" does not require that 
we permit American firms to enter international agreements 
restricting imports into the United States, however desirable 
such action might appear to certain elements in other coun- 

Many of the issues underlying the Council's proposals 
clearly have to do with American participation in foreign cartel 
agreements that do not limit imports into the American market 
and affect American competition only indirectly and slightly. 
It would be the author's view that such participation does not 
violate the antitrust acts, but not until a substantial number of 
cases have been brought in this unadjudicated area will it be 
possible to know the precise limits of permissible action. 
Clarification of these issues cannot, however, be expected 
from new legislation, which would confront the same judicial 
processes as face the Sherman Act in the foreign field. The 
defining of Sherman Act limitations could be greatly ac- 
celerated by stipulating the facts in a series of case? and asking 
for judicial determination, but it seems doubtful whether 
adoption of the standards suggested by the Council, or of any 
similar set of conditions, would broaden the area of permissible 
business agreements in international trade. 

That international cartel participation coidd be used as an 
instrument of foreign policy there is no question. Protection 
of a domestic industry might be accomplished as readily by 
cartel agreement as by a protective tariff. Exports might, on 
occasion, be expanded by throwing the weight and prestige of 

• 83 • 

Controlling World Trade 

the American government behind the demands of our ex- 
porters for a larger quota in a cartel agreement. The govern- 
ment's judicious handling of American participation in 
patents and processes agreements might be used to withhold 
from other countries processes of military significance and 
acquire from abroad such processes for our own use. It might 
also be feasible, through American cartel connections, to exert 
pressure on other governments and thus add to our repertoire 
of foreign-policy devices. It would be possible to make 
cartel participation serve all these ends, but not without a 
radical change in the existing relation of government to 
business in the United States, and not without converting our 
export policy into a kind of commercial imperialism.^ Postwar 
security developments and changes in the structure of world 
trade may force us in this direction, but it seems highly un- 

1 Consideration of the events leading up to the suggested Anglo-American Oil 
Agreement is illuminating in this connection. Substantial interests in the oil in- 
dustry foresaw the advisability of international business agreements relating to 
oil sponsored and supervised by governments. C/., A Foreign Oil Policy Jor the 
United States, prepared by the Foreign Operations Committee of the American 
Petroleum Industry, Nov. 5, 1943. It was largely industry influence that led 
the American government to participate in oil discussions with the British gov- 
ernment. Out of these discussions came the proposal that all countries interested 
in the petroleum trade be invited to enter into an International Petroleum Agree- 
ment establishing a permanent International Petroleum Council. 

Although the principles suggested for the development, under international 
agreement, of the world petroleum industry were most general and unexceptional 
and closely resemble the recommendations on oil policy in the industry statement 
mentioned above, the industry, on second thought, found them portentous and 
disturbing. Consequently, the Petroleum Industry War Council, in a resolution 
reported Dec. 11, 1944 {cf. The New Tork Times of that date) called upon the 
Senate to reject the proposed Agreement. Oddly enough, among the reasons 
cited is that the Agreement would "legalize cartels," A proper oil policy for the 
United States would be, according to the Council, for the government to give to 
its nationals 

. . . necessary and legitimate diplomatic support in their foreign oil operations 
and [to foster] the private enterprise of its nationals so engaged. In addition, the 
resolution recommended that the Government directly and indirectly not engage 
in foreign oil operations and that there be created an international instrument 
of consultation and collaboration, without power of enforcement, in which there 
is joint government-industry representation. 

• 84 • 

American Policy Toward Business Agreements 

desirable to alter our national policy until we are compelled to. 
For the present it seems to the author that a reasonable inter- 
pretation of the Sherman Act, with the Webb-Pomerene 
exemption, gives American exporters all the leeway they need 
for effective participation in postwar foreign trade. 


Along with its recommended legislative standards, the 
National Foreign Trade Council proposes the advance clear- 
ance of foreign-trade agreements by an administrative agency, 
preferably the U.S. Department of State. A proposed or ex- 
isting agreement could be disapproved only "on the ground 
that it constitutes an unreasonable restraint of trade, not 
justified in the light of applicable foreign laws and conditions 
or by our foreign economic policy.".^ At any time during the 
life of an agreement the clearance agency could, after hearings 
and a finding that unreasonable restraint of trade did exist, 
order a change in the agreement or in the practices agreed. 
"Only upon failure to amend the agreement or the practices 
after a reasonable opportunity to do so could proceedings be 
initiated under the antitrust laws."^ 

The argument that the very uncertainty of the law relating 
to business agreements makes advisable the advance clearance 
of proposed business plans is, of course, an old one. Intermit- 
tent agitation for advance clearance by the U.S. Department 
of Justice of business plans in domestic trade dates back at 
least to 1910, but, since it has never shown signs of productive 
results, the issue must properly be judged dead. The 

1 Memorandum on Regulatory Measures Affecting American Foreign Trade, p. 25. 

2 National Foreign Trade Council, ibid, p. 22. In his Harper's article, op. 
cit., p. 576, Milo Perkins suggests that hearings before the review board, there 
proposed, might be requested by (a) The Department of Justice if it fears a viola- 
tion of the antitrust laws within the United States, (b) The American corpora- 
tion which has filed the agreement, and which wants a yes or no answer so that it 
can do its business with dispatch, (c) Any interested business firm not a party to 
the cartel agreement but presumably within the same industry, and therefore 
vitally affected. 

• 85 • 

Controlling World Trade 

basic reason for rejection has always been the impossibihty, 
in borderhne cases, of determining in advance the reasonable- 
ness of a plan when the test of reasonableness depends ulti- 
mately on its effects in the special circumstances governing a 
particular industry. Of course, the validity of a judgment on 
whether or not a business plan is likely to involve a restraint 
of trade depends on the amount of information disclosed. 
Since it is never possible for industry to acquire in advance all 
the relevant information, and never possible for government 
officials to know whether industry has disclosed all the avail- 
able information, complaints of unreasonable restraint of 
trade brought later against agreements already cleared are 
bound to provoke recrimination and charges of bad faith. the issues likely to be sufficiently different in postwar 
foreign trade to justify a procedure consistently rejected for 
domestic trade? Proponents contend that (1) the area in 
which the antitrust acts might be applied is much more in- 
determinate in foreign than in domestic trade and (2) be- 
cause of foreign policy considerations, business firms will 
sometimes find themselves urged by one government depart- 
ment to take action forbidden by laws enforced by another. 

1 . Application of the antitrust acts in foreign trade is cer- 
tainly far from being clearly defined. The principal reason, of 
course, is that international business agreements and Webb- 
Pomerene activities, long unchallenged by enforcement 
authorities, are now subject to active prosecution and in- 
vestigation by both the Antitrust Division and the Federal 
Trade Commission. Several years of active adjudication will 
be necessary before the law regarding foreign-trade practices 
is as well established as that effecting domestic- trade practice. 

The element of uncertainty, however, can be and is ex- 
aggerated. There can be no doubt that many recent inter- 
national business agreements restricting imports into the 
United States are illegal. As has sometimes been the case in 
domestic trade, the suspicion cannot be avoided that what is 
really complained of is the certainty rather than the uncer- 

• 86 • 

American Policy Toward Business Agreements 

tainty of the applicability of the rules. The principal un- 
defined area is that involving participation by American firms 
and export associations in agreements restraining trade in 
foreign areas. 

There is, moreover, machinery already available for clear- 
ing up ambiguities, and for mitigating penalties for unintended 
violation. By advance disclosure of plans to the U.S. Depart- 
ment of Justice, firms and associations can avoid at least 
criminal prosecution, while stipulation of the facts in a few 
basic issues can facilitate the process of judicial interpretation. 

Nothing, in short, is to be gained by a revision of the anti- 
trust acts introducing new standards of reasonableness appli- 
cable to international trade, themselves subject to judicial 
interpretation. Pending such interpretation, government 
officials would be as much in doubt as anyone, and, bearing 
the responsibility of advance clearance, would, be likely to 
construe what is permissible under business agreement rather 
narrowly. If antitrust sentiment were something less than bone 
and sinew of the American mores, advance approval of foreign- 
trade plans might be lightly entrusted to administrative ruling. 
Under existing circumstances, however, this procedure would 
probably only clog the wheels of foreign trade. 

2. In favor of advance clearance it is argued that inter- 
national business agreements are sometimes urged for reasons 
of public policy by a government department concerned with 
foreign activities. But if American firmxS are not protected 
against later prosecution under the antitrust laws, they will 
be loath to undertake such agreements no matter hov/ urgent 
the public policy. In the 1920's the U.S. Department of 
State fostered oil arrangements in the Middle East that might 
possibly not meet present-day tests of what is "permissible" 
restraint of trade. In promoting exports of material required 
for rehabilitation of war-devastated areas, government 
agencies might find needful a measure of business solidarity 
exceeding the limits set by current antitrust standards. 

Not advance clearance but a change in the standards of 

• 87 • 

Controlling World Trade 

permissible agreements is the real issue here. Advance clear- 
ance would be chiefly useful in facilitating emergency arrange- 
ments under the new standards. If the issues involving public 
policy are limited to a particular area, legislation excepting 
this area from the application of the antitrust acts would 
appear to be appropriate. Should the United States partici- 
pate in an international oil agreement regulating foreign 
trade in oil, which seems unlikely, it would presumably take 
some such action. If the issues are of an emergency character 
requiring not only temporary suspension of the antitrust acts 
but advance clearance, the course to follow may be the war- 
time arrangement whereby the Secretary of War or the Secre- 
tary of the Navy would certify that a business plan was 
necessary to the war program, and that certification was ac- 
cepted by the U.S. Department of Justice as precluding the 
enforcement of the antitrust acts against the participating 

While an emergency might conceivably justify the temporary 
abandonment of antitrust standards as applied to inter- 
national business agreements, it seems improbable that any 
such emergency lies immediately ahead. In the situation out- 
lined above, export associations are likely to be able to meet 
any normal demands in foreign trade. The procedures sug- 
gested here to meet special cases fall far short, nevertheless, of 
the National Foreign Trade Council's proposed program. 


The exchange or conveyance of patent rights and technical 
know-how may be the basis for any one of the various types of 
restrictive international business agreements discussed in this 
chapter. American subsidiaries in foreign territories may 
participate in domestic technical data agreements that regu- 
late sales in a local market. Our firms may participate with 
foreign firms in patents and processes arrangements that limit 
competition in third countries and divide world markets. 
All these agreements may be and are used to restrict imports 

• 88 • 

American Policy Toward Business Agreements 

into the United States. In fact, for highly fabricated and 
speciaHzed products, the patents and processes agreement is 
the typical international arrangement. 

In the previous chapter, two possible lines of remedial action 
were suggested for international agreements: (1) registration 
of patents and processes agreements and the interchange 
among governments of the information made available, which 
together might lead to a multilateral modification of patent 
policy directed toward curbing the more restrictive practices; 
and (2) the exchange of research results among government- 
supported laboratories and research foundations, which might 
lead to a wider dissemination and freer use of industrial 

To date, government activity in the field of American in- 
dustrial technology has been pretty much limited to the war 
years. Successful termination of the recent war has, however, 
found our government, as represented by the Alien Property 
Custodian, in possession of a large number of enemy-owned 
patents. It will, furthermore, be possible and advisable to 
gain access to industrial technology developed during the 
war in enemy countries. Government ownership of the 
patentable techniques acquired, nonexclusive licensing to its 
nationals, and free exchange among the United Nations would 
appear to be highly desirable and might go far toward de- 
creasing limitations on the use of technology in the rapidly 
developing synthetic-fibers, oil, rubber and plastics in- 
dustries. If this opportunity is to be successfully exploited, the 
government probably should establish its own research 
agencies in at least some fields. 

Although international action along lines suggested in 
Chap. II might help to free international technological ex- 
change from its present restrictions, its effectiveness would ob- 
viously be limited. Furthermore, it must be reemphasized 
that the highly desirable exchange of research results and 
technical know-how between nationals in difi'erent countries 
may involve a considerable limitation of competition among 

• 89 • 

Controlling World Trade 

them not only in their own but in third countries. This will 
have to be accepted along with the benefits of the technical 

Insofar as patent rights are conveyed or exchanged, it is 
within the competence of the government concerned to 
modify these rights by changes in its national patent policy. 
The international aspects of patent policy are overshadowed 
by the domestic. It seems probable that the conditions 
under which American patents are granted should be 
the same for domestic applicants as for foreign. What 
these conditions are must be determined primarily by 
domestic considerations. It is possible, however, and desirable, 
to prevent an American patent holder from licensing foreign 
patents owned by him under conditions that limit exports to 
the United States. Here again considerations relevant to 
domestic patent policy should probably govern action in the 
foreign field. If it is desirable to give the American purchaser 
the benefit of competition in the sale of a licensed article in 
domestic trade it would seem desirable to take such action as 
may be necessary to accomplish the same result in foreign trade. 

The most common rights inherent in international patent 
exchange or conveyance are restrictions on area of sale and 
field of use. The first point at issue is, then, how an inter- 
national exchange of technology would be affected by a do- 
mestic modification of these rights. If American firms are 
prevented from acquiring patents subject to such restrictions, 
will foreign owners continue to seek patents in the United 
States or to license them to American users? Specifically 
would I.G. Farben license an American firm to use a Far ben- 
owned patent if it could not prevent the user from exporting 
his products to Germany, where they would compete with 
those I.G. Farben? The alternatives open to the German 
company, if it wanted to avoid American competition in the 
German market, would be (1) not to patent its process in the 
United States or (2) to take out the patent but to refuse to 
license an American user. 

. 90 . 

American Policy Toward Business Agreements 

By following the first course it could not prevent American 
firms from experimentation that might lead to the discovery of 
the same or a similar process and to the appearance in world 
markets of important American competitors. Such a refusal 
to patent would also deprive the German company of any 
gains that would accrue from working or licensing in the 
United States. In these circumstances the German company 
might well choose the second alternative. I.G. Farben could 
apply for the patent and work it through a subsidiary, en- 
joined from exporting to Germany. Or, if this were im- 
practicable, the German firm could patent the process, 
limiting American experimentation in this field, but refuse to 
license and thereby protect itself against possible imports into 
Germany. A refusal to work or license could, of course, be 
stopped by domestic legislation to establish compulsory licens- 
ing with or without a showing of patent abuse. Such legisla- 
tion would, no doubt, be precipitated by any widespread 
refusal of foreign owners to work or license their American 

On the whole, a considerable reduction in the restrictive 
rights adhering to patents could probably be accomplished 
by domestic legislation without lessening appreciably foreign 
applications for patents in the United States. It might, how- 
ever, lead to the working of these patents by foreign-owned 
subsidiaries rather than by American licensees, and in that way 
might considerably restrict the flow of technical know-how 
without which patents are frequently unworkable. This loss 
would have to be balanced against the gain that would follow 
from a wider use of the technology that continued to flow to 
the United States. 

A consideration of domestic patent reform lies outside both 
the scope of this report and the author's competence. It is 
worth noting, however, that the present magnificent con- 
fusion surrounding American patent law and policy serves 
to cloak American participation in international patents and 
processes agreements with an aura of profound ambiguity. 

. 91 . 

Controlling World Trade 

In the present situation it is often difficult for a man to know 
(1) whether he has a patent, (2) if so, what rights he enjoys 
under it and (3) how long and under what conditions the 
rights may be assumed to endure. 

Although the Bureau of Patents, moved doubtless by recent 
revelations of abuses, is applying increasingly rigorous stand- 
ards to patent applications, a marked cleavage still exists be- 
tween patent rights granted by the Bureau and rights that the 
courts will protect from infringement/ In consequence a firm 
may sometimes be at a loss to know when it has a patent and 
when it has merely a piece of paper. If we accept the very 
interesting views of Justice Arnold, expressed in the recent 
decisions in Potts v. Coe,^ and Special Equipment Company v. 
Coe,^ then either the cleavage will widen, or the Bureau will 
have to revise its standards. 

It has been ruled that a patentee may not attach to a license 
conditions that would increase his monopoly or permit him to 
acquire other monopoly powers not granted by the patent.^ 

1 Report of the National Patent Planning Commission, p. 5 : 

There is an ever widening gulf between the decisions of the Patent Office in 
granting patents and decisions of the courts who pass upon this validity. It would 
be highly desirable and a great step forward if patents could be issued with a 
greater assurance that their validity would be upheld by the courts. 

2 140 F. 2d 470. After an illuminating discussion of corporate research, the 
judgment in this case continues. 

In other words, patents are not intended as a reward for a highly skilled 
scientist who completes the final step in a technique, standing on the shoulders of 
others who have gone before him. By the same token they are not intended as a 
reward for the collective achievement of a corporate research organization. . . . 
To give patents for such routine experimentation on a vast scale is to use the 
patent law to reward capital investment, and create monopolies for corporate 
organizers instead of men of inventive genius. . . . This is not to say that an 
employee of a great research laboratory may not make an invention. [But to 
receive a patent would require the presentation of evidence on] . . . the level 
of the art in that research organization at the time the application is made. This 
principle simply emphasizes the importance of individual achievement, which is 
the aim of the patent law. 

2 13 U.S. Law Week 2010. 

4 Cf. Ethyl Gasoline Corp. et al., v. U.S., 309 U.S. 436. Opinion of Stone C.J. 
at p. 456. 

• 92 • 

American Policy Toward Business Agreements 

But judicial views on what conditions constitute such an in- 
crease or acquisition have undergone a radical change in 
recent years. The dividing line between justifiable patent 
monopoly and unjustifiable restraint of trade has tended to 
bite into the former and steadily to constrict the scope of the 
patent monopoly. In the Morton Salt case, the judgment 
went so far as to assert that a patent used illegally to restrain 
trade is not defensible against infringement.^ 

Not only, therefore, are many of the rights exchanged in 
existing international patents and processes agreements no 
rights at all, but for the future there is no clear definition of 
the limits within which American participants can convey or 
acquire patent rights by international agreement. Nor is 
change in American patent law likely to be confined to changes 
in judicial interpretation. There are four patent bills already 
before Congress and others may be anticipated. 

This confusion, manifest in our patent law and its relation 
to antitrust law, is no doubt hampering business, but it 
affects chiefly domestic rather than foreign trade. Neither 
new legislative standards applicable to foreign-trade agree- 
ments nor advance clearance of such agreements can be ex- 
pected to lessen the confusion. Extensive and intolerable 
patent abuse has produced so adverse a reaction among 
legislative, administrative and judicial agencies that thorough- 
going reform of our patent policy is inescapable. What may 
or may not be done with patents underlying foreign-trade 
agreements must wait for clarification of this reform. 


United States policy with respect to the participation of its 
nationals in international business agreements should be de- 
signed to encourage foreign trade, foreign investment and the 
exchange of technology among countries under conditions 
that, so far as practicable, preserve competitive opportunities, 
in both domestic and international trade, and the access to 

1 Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488. 

• 93 • 

Controlling World Trade 

foreign markets of all American exporters. The advantages of 
foreign trade are not to be understood in terms of maximum 
profit per unit but rather in terms of the total volume of ex- 
ports and imports. Our policy, it is true, must be adapted to 
the organization of world trade as it develops in the postwar 
years, but the influence of the United States on the very or- 
ganization of that trade may, if properly used, be considerable. 
A clear line between legal and illegal participation, as deduced 
from judicial interpretation of the antitrust acts, may, it is 
hoped, permit international business agreements that will 
forward American foreign-trade and business interests in the 
direction suggested above. Specifically, this would mean: 

1 . That export associations be permitted to take such action 
as may be necessary to present a common front to foreign 
competitors or foreign buyers. 

2. That American associations, firms, and their sub- 
sidiaries or affiliates abroad may legally participate in domestic 
or international cartel arrangements not affecting American 
imports or the exports of competing American firms. 

3. That American export firms and associations may not 
legally participate in international business agreements re- 
stricting exports to third countries or dividing world markets. 

4. That participation in agreements that limit imports into 
the United States is clearly illegal. 

5. That American participation in international patents 
and processes agreements is illegal only if the parties attempt 
so to enlarge the monopoly rights exchanged as to restrain 

The scope of patents rights exchanged might be further 
contracted by judicial interpretation and by domestic legisla- 
tion here and elsewhere. 

It must be recognized that the categories of international 
business agreements suggested above give only a partial indi- 
cation of the range of variation possible within them, and that 
the effect of American participation on domestic competition 
and on foreign trade is difficult to appraise apart from the 

. 94 . 

American Policy Toward Business Agreements 

particular circumstances of each case. Since judicial inter- 
pretation of the antitrust acts in foreign trade is only now under 
way, the knowledge of what is and what is not permissible is 
very limited, and there is no denying that this element of un- 
certainty will, for some time, act as a deterrent on American 
trade and foreign investment. 

It seems improbable, however, that legislative changes 
would accelerate clarification, since new standards would 
have to undergo the same process of judicial testing. Nor is 
there any reason to believe that any radical departure from 
standards embodied in the present antitrust acts would be 
acceptable to Congress or to the public. 

Those American interests that might be advanced by inter- 
national cooperation restricting or regulating the flow of goods 
in foreign trade should not be entrusted to private business 
agreement, even under a procedure of advance clearance by 
government agencies. Such commodity cooperation can 
probably best be accomplished by legislation or by treaty 
limited to a particular field, under established intergovern- 
mental controls. 

This view and these recommendations are obviously based 
upon a forecast of world trading conditions that may in time 
be found to diverge widely from reality. It seems best, how- 
ever, to preserve our general policy toward American partici- 
pation in international business agreements unless or until it 
is clearly shown to be unworkable. 



SECURITY measures are of two sorts: those concerned with 
prevention of war and those concerned with preparedness 
for war. The admonition "trust in God but keep your pow- 
der dry" recognizes, in a way, both aspects. Any attempt 
to prevent war must seek to eUminate sources of aggression and 
at the same time devise international machinery to mini- 
mize the effect of aggression where it cannot be ehminated. 
A concurrent preparedness for war is, of course, a confession of 
inadequate faith in preventive measures. Yet it is safe to say 
that this lack of faith will govern the actions of all powers and 
that the search for security will proceed along both roads. 

It is alleged that (1) the continued existence of cartels, 
particularly German cartels, will jeopardize American 
security by hindering both the prevention of war and prepara- 
tions for defense; (2) domestic cartels have been and will, if 
unchecked, continue to be a potent source of German aggres- 
sion; and (3) American participation in German-dominated 
international cartels lessened the output of war materials in 

1 The preceding chapters, it is hoped, have made it clear that the author ad- 
vocates (1) the pursuit, by international agreement, of a strong anti cartel policy 
and (2) the strict enforcement of the antitrust acts against the participation of 
American firms in cartel arrangements that restrict imports into the United 
States and the exports of nonparticipating American firms. The present chapter 
is, in part, an attack upon the exaggerated shape and size into which the cartel 
problem is being blown by Congressional hearings and by the literature that has 
drawn upon these hearings. It may be freely admitted that anticartel propa- 
ganda has been extraordinarily successful in awakening the public to a problem 
whose existence might otherwise have been ignored. However, if a reasonable 
solution to the problem is to be found, it is also necessary to form a reasonable 
estimate of the magnitude of these objectionable practices and of their incidence. 
It is the author's view that the harm is sufficient to justify an aggressive anti- 
cartel policy, but that this harm has been, in the main, to our peacetime foreign 
trade rather than to our preparations for and conduct of war. Because it is 
difficult to attack an exaggeration of a problem without seeming to deny the 
existence of the problem this cautionary note seems necessary. 

• 96 • 

Cartels and American Security 

the United States and enabled Germany to engage in espion- 
age and fifth-column activities. 

In considering the security case against cartels one must 
begin by asking certain questions. How great was the effect 
of American participation in international cartels on Ameri- 
can war output: was it of the order of a fraction of 1 per cent 
or was it substantial? Are the alleged effects attributable 
solely to cartels, or are cartels merely an instrument for 
achieving policies that will be realized by other means if 
cartels are not available? What is to be done with inter- 
national and German domestic cartels if their activities are 
found to be demonstrably prejudicial to American security? 


The security case against participation of American firms in 
international cartels was developed mainly by the Antitrust 
Division of the U.S. Department of Justice in a series of Con- 
gressional hearings^ and in a long list of complaints, many of 
which terminated in consent decrees involving the abandon- 
ment of practices deemed objectionable. More recently the 
War Division of the Department of Justice has sought to 
determine the effect on American security of domestic 
cartelization in Germany and of German participation in 
international cartels. The material made public in hearings 
and in antitrust complaints has already been exploited in a 
considerable volume of somewhat sensational literature. 

The cartel activities alleged to have endangered American 
security took the form, in the main, of an exchange between 
American and German firms of patents and techniques. 
In antitrust terminology, an agreement to exchange patents 
apparently becomes a cartel under certain conditions: when 

1 Hearings before the Committee on Patents, U.S. Senate, 77th Congress, 2d 
Session, 1942, Parts 1-9 (Bone Committee); Hearings before a Special Committee 
Investigating the National Defense Program, U.S. Senate, 77th Congress, 1st 
Session, 1941-42, Part 2, (Truman Committee) ; Hearings before a Subcommittee 
of the Committee on Military Affairs, U.S. Senate, 78th Congress, 1st Session 
1943, (Kilgore Committee). 

*. 97 . 

Controlling World Trade 

freedom to use the patent is limited in any one of a number of 
ways; when patents are so pooled or cross-licensed as to ex- 
clude other firms from technological knowledge that would 
be available in the absence of the agreement; and when a 
patent exchange is made the basis of a restrictive agreement 
on unpatented processes or articles. The word "apparently" 
is used advisedly, since the term "cartel" is employed with 
such conscious vagueness and the overtones invoked are so 
sinister and ominous that it is far from clear within what 
limits the cartel problem is being discussed. At one time it 
appears that any exchange of technology between firms in 
different countries partakes of the nature of an international 
cartel, while, at another, the maintenance of a subsidiary 
abroad is treated as a cartel operation. 

In this vein the present chief of the Antitrust Division, 
Wendell Berge, testified before the Kilgore Committee: 

The South American market has been extremely important to 
Germany. It was in South America that she first hoped to be able 
to achieve political penetration under cover of commercial arrange- 
ments. She used the South American branches of her commercial 
firms as centers of espionage, propaganda and political activity. 
Her first step in regaining her power will be to reestablish, if she 
can, these agencies in Latin America. 

We must do more than to prevent the resumption of these cartel 

When asked what he considered his most important con- 
tribution as chief of the Antitrust Division, Thurman Arnold 
is reported to have replied, 'T have popularized throughout 
the United States the meaning of the v/ord cartel." But so 
loosely is the term used at present that it seems about to pass 
into that vocabulary of vague and threatening gestures where 
repose such terms as "Red," "Bolshevik" and "un-American." 
There is a real question in the author's mind whether over- 
exaggeration of the cartel problem has not already gone far 
toward discrediting anti-monopoly policy in general and, by 
confusing legitimate with illegitimate business practices, has 

• 98 • 

Cartels and American Security 

not contributed materially to an unsound relationship between 
business and government in the United States. 

Any consideration of patents in relation to antitrust policy 
bogs down in a juridical maze having to do with where the 
legal monopoly granted by patent right leaves off and where 
illegal monopoly, within the meaning of antitrust policy, be- 
gins. There is no doubt, furthermore, that patent-licensing 
and patent-exchange provisions that were legal when con- 
summated 10 or 15 years ago are no longer legal today. It is 
not, however, the purpose of this report to consider in detail 
the circumstances that render a patent agreement legal or not 
legal under the antitrust act; such a consideration, moreover, 
lies beyond the author's competence. 

The fact is that in the middle 1920's American firms began 
on a large scale to enter into patent-exchange and patent- 
licensing arrangements with German and British firms, and 
these arrangements included the extensive exchange of un- 
patented industrial techniques. We shall call these arrange- 
ments international cartels (1) when the patents were ex- 
changed or licensed under conditions limiting their use, (2) 
when the patent exchange took the form of a pooling or cross- 
licensing arrangement enlarging the market controls of the 
participating firms, and (3) when the restrictions on patents 
exchanged were extended to unpatented articles or processes. 

This is not to say that all the foregoing practices are illegal, 
nor is it contended that these practices exhaust the meaning 
of international patent cartel. They do, however, constitute 
the crux of what has come to be known as the "international 
patent cartel" problem, and it is participation in arrange- 
ments of this sort that is alleged to have jeopardized Ameri- 
can security in the prewar period. 

In the period under consideration, patents licensed be- 
tween firms in different countries carried numerous restrictive 
provisions. Among the most common were restrictions on 
exports outside licensed territory, restrictions in the field of 
use, and provisions for assignment of future patents. Con- 

. 99 . 

% Controlling World Trade 

siderably less common, but sometimes more important, were 
restrictions on output and price. A German firm might license 
an American firm to use a patent on condition that the 
article produced not be exported outside the United States 
or, perhaps, outside North and South America. A processes 
patent might be licensed for production of one type of article 
but forbidden in the production of other types for which the 
process was equally well adapted. Division of territory be- 
tween firms was facilitated by provisions that all subsequent 
patents would be cross-licensed between them. 

Sometimes, when a small number of firms hold comple- 
mentary patents on the processing of an article, a pooling of 
the patents will give the members a greater control over the 
sale of the article than the sum of the independent patents 
held by one producer. Pooling of this sort, that takes place 
among firms in difi'erent countries as well as among firms in 
the same country, thus becomes, by our definition, an inter- 
national patent cartel. The cross-licensing of a large number 
of patents among firms in the same technical branch of in- 
dustry (say, pharmaceuticals) facilitates a division of ter- 
ritory and imposition of other restrictive agreements aff*ecting 
unpatented articles. 

Such patent arrangements as these between American and 
German firms are alleged to have restricted the output of war 
materials in the United States, to have been used here by 
Germany for espionage and fifth-column activities, and to 
have resulted in technological research specialization that 
was all in Germany's favor. It is further alleged that during 
the war Germany used her cartel connections in the United 
States to maintain her Latin American markets and used her 
cartel connections in Latin America as a base for political 
and psychological warfare directed against the United States. 
Overshadowing the ostensible commercial arrangements are 
discerned the German government's political objectives, in 
process of attainment through the international cartel connec- 
tions of German firms. This was "Germany's Master Plan." 

• 100 • 

Cartels and American Security 

It is possible to ring the changes very effectively on these 
allegations. For example, the argument that a patent ex- 
change has brought the United States a technical process use- 
ful in war production is countered by the charge that such 
exchanges foster technical research in Germany leading to 
improvements of which the United States may be deprived. 
If, again, a patent is licensed in the United States under 
conditions limiting export, it is claimed that freedom of ex- 
port might create a market for technical research here that 
would make it unnecessary to accept from abroad technolog- 
ical improvements under limiting conditions. On the other 
hand, it is possible to cite chapter and verse in support of all 
the allegations of advantages claimed for Germany. 

Restrictions on the international exchange of technology 
have created a monopoly problem that requires remedial 
action. Effective measures, however, are not likely to be de- 
vised until the problem has been reduced to its proper mag- 
nitude and defined with greater exactness. Some progress 
may be made toward these ends if we consider the foregoing 
charges in more detailed fashion. 

Effect of Patent Exchanges on American War Production 

One way of judging the effect of American participation 
in international patent cartels on United States war pro- 
duction is to equate the shortage of cartelized materials to 
military requirements. Thus, Messrs. Borkin and Welsh 
assert, "Whenever there was a cartel before, in 1942 there 
was a military shortage."^ Unfortunately for this argument, 
the shortage was equally great among articles competitively 
produced, such as cotton textiles, machine tools, beef, eggs 
and butter. The decisive factor was the sudden rise in re- 
quirements, not the monopolistic or competitive conditions 
of production. 

A second basis for judgment rests on the fact that during 

1 Joseph Borkin and Charles Welsh, Germany's Alaster Plan, Duell, Sloan & 
Pearce, New York, 1943, p. 13. 

• 101 • 

Controlling World Trade 

the 1930's German industrial production expanded while 
American industrial production marked time. Thus Borkin 
and Welsh, "In the years immediately preceding the war, the 
comparative production figures of the United States and Ger- 
many for those materials on which twentieth-century military 
efficiency most depends were all in Germany's favor." Apart 
from the fact that this was not true of steel, coal, ferro-alloys, 
lead, zinc, copper and a host of other materials on which mili- 
tary efficiency depends, the basic factor explaining the differ- 
ing rates of growth was, of course, the increase in German 
military expenditures, which began in 1933. 

If an over-all comparison of German versus American mili- 
tary output is attempted, everything that is known favors the 
latter. American military output not only rose more rapidly 
than the German but at its height showed a yield per man at 
least as much greater as one would expect from prewar com- 
parisons of relative manhour productivity. By this time the 
superlative performance of the American economy at war 
should be too well established to be questioned. It should 
follow then that if American participation in international 
patent cartels had any effect — either plus or minus — on over- 
all military output it must have been so small as to be negligible. 

This is not to say that instances are lacking in support of 
the view that American war production was hampered. The 
over-all effects, however, were minute, and to counter them 
there are processes and materials useful to the war effort that 
were secured from Germany. Among the many cases of 
restriction on war production presented by the Antitrust 
Division in complaints and in Congressional hearings, two of 
the most highly publicized may be selected for closer examina- 
tion. These cases, treated at length in hearings and antitrust 
suits, concern Carboloy and magnesium. 

The Carboloy Case. Carboloy is the trade name for cemented 
tungsten carbide, whose chief use is as a hard tip on metal- 
cutting tools. Tools tipped with Carboloy can perform most 
cutting operations at four times the speed of high-speed steels 

• 102 • 

Cartels and American Security 

and will retain their sharpness much longer. Obviously, 
Garboloy is a product of great potential value in munitions 

Before 1928, tungsten carbide was exported to the United 
States by Krupp, which also licensed its production to a num- 
ber of American firms. Both General Electric and Krupp 
controlled patents bearing on the production and processing 
of tungsten carbide, and in 1928 they entered into a patent- 
pooling agreement. Under its terms, GE was obligated to fix 
the price at which tungsten carbide was sold in the United 
States, to grant licenses to produce and sell at this price to 
firms formerly licensed by Krupp and to pay Krupp royalties 
on all metal sold by GE or its licensees. Krupp was obligated 
to refrain from manufacture in the United States and to sell in 
the United States only at prices fixed by GE. Both firms 
agreed to pool their technical information. The legality of 
this agreement is still under adjudication in the courts; we are 
here concerned only with the economic consequences. 

Following the agreement, GE created the Garboloy Cor- 
poration of Detroit, which proceeded to establish a maximum 
price for the product of $453 a pound and a minimum price to 
large purchasers of S360 a pound. Krupp had formerly sold 
its tungsten carbide at $50 a pound. It is persuasively argued 
by the Antitrust Division that the purpose of the higher price 
was to discourage Krupp by reducing not only his sales but 
his royalty collections in the United States. The president of 
the company maintains that intensive development of the use 
of tungsten carbide in the United States required an increase 
in the size of motors and in the rigidity of machine-tool 
mountings, that men had to be kept in the field to instruct 
customers and that what was sold in the first few years was 
essentially a service.^ 

1 Bone Committee Hearings, Vol. I, p. 256. Statement of W. G. Robbins. 
If so it appears to have been {a) an unconscionably expensive service and {b) one 
that Krupp would have been glad to render at a fraction of the Garboloy Com- 
pany's price. 

• 103 • 

Controlling World Trade 

Whatever the merits of these arguments, it is a fact that 
Krupp became dissatisfied with the arrangement and pro- 
posed either a considerable reduction in price, thereby in- 
creasing its sales and its royalties, or a capitalization of 
royalties and a withdrawal by Krupp from the market. Paren- 
thetically, one might ask how, in 1936, Krupp's interest in in- 
creasing the use of tungsten carbide in the United States 
fitted in with Germany's Master Plan. General Electric ac- 
cepted the second alternative and in 1936 the contract was 
amended to provide for Krupp's withdrawal from the Ameri- 
can market and for increased royalty payments by General 

The maximum price was immediately lowered to $225 a 
pound. It was lowered again in the late 1930's, was drasti- 
cally cut after the basic patents were declared invalid in 1940,^ 
and dropped again when the U.S. Department of Justice 
brought an indictment against GE in 1941. 

During the 1930's, the consumption of tungsten carbide in 
the United States lagged markedly behind consumption in 
Germany and somewhat behind that in England. In the 
middle of the decade 1930-1940, German consumption was 
eight to ten times the total for the United States. The Anti- 
trust Division attributes this discrepancy to the price, the 
company to the fact that the development started earlier in 
Germany. Certainly the extensive retooling required by 
German armament expansion, plus the fact that tungsten 
carbide was increasingly used in projectile cores in large-scale 
production in Germany but not in the United States, goes far 
to explain, the difi'erence in consumption between the two 
countries in the second half of the 1930's. 

Without a greater knowledge than that aff'orded by the 
existing facts, it is not possible to judge the extent to which 
consumption and the rate of increase in consumption of 
tungsten carbide were afi'ected by restrictive practices and 

1 General Electric et al. v. Industrial Diamond Co. et al., 33 F. Supp., p. 969, 

• 104 • 

Cartels and American Security 

prices.^ The circumstance, however, that the invalidation of 
patents brought the price to a relatively low level in 1 940, and 
that under the impact of war orders monthly production 
rose from 265 kilograms in 1938 to 10,000 kilograms by the 
middle of 1941, indicates that neither price nor lack of ex- 
perience in the use of tungsten carbide was a significant 
handicap to war preparations. 

It is the author's view that both the arrangement with 
Krupp and the price policy followed by the company after 
1936 and prior to the invalidation of patents are indefensible. 
Such practices clearly call for remedial action. At the same time 
the lurid exploitation of this case in Congressional hearings and 
elsewhere makes it necessary to emphasize that (1) the in- 
fluence of the German partner in this arrangement was 
thrown in the direction of lowering price and expanding sales 
in the American market; (2) armament expansion in Ger- 
many was an important cause of the difference between the 
rate of use of this material in Germany and the United States 
in the 1930's; and (3) the effects of the objectionable practices 
on American industrial output were probably moderate and, 
on American war preparations, negligible. 

Magnesium Case. Attracted by the high price of magnesium, 
eight American companies came into production during the 
First World War, but of these only two survived the postwar 
price decline: the Aluminum Company of America and the 
Dow Chemical Company of Midland, Mich. Dow's produc- 

^ Nevertheless, some absurd statements have been made concerning the effect 
of tungsten carbide on industrial production. Cf. Fortune, Vol. XXV, No. 1 
(January 1942), and Borkin and Welsh, op. cit., p. 264: "Qualified experts have 
stated that tungsten carbide is the key to a 20 per cent increase in the total in- 
dustrial production of the United States.'* 

If one assumed that all machine tools capable of being converted were 
tipped with Carboloy overnight, and that, by reason of greater efficiency of cut- 
ting operations, four-fifths of the operators of these machines were thereby re- 
leased for employment elsewhere, one might, by using figures in the ratio of 
machine-tool operators to the total industrially employed, form some estimate of 
the potential increase in industrial output involved. The percentage in question 
would be nearer one than five. 

• 105 • 

Controlling World Trade 

tion had as its base magnesium chloridej a by-product of the 
Company's principal chemical output. Alcoa used magnesium 
chiefly as an alloying material for aluminum, but both Alcoa 
and Dow fabricated and sold magnesium alloys. In addition, 
Dow licensed a number of small fabricators of magnesium. 
No one has charged that before 1 927 there existed any obstacle 
to the free production and fabrication of magnesium, yet in 
that year total United States output was less than 150 tons, 
and Dow, the principal and lower-cost producer, was barely 
breaking even on magnesium sales. Production was hampered 
by the high price of magnesium ingot in relation to the price 
of aluminum, but to an even greater extent by the difficulties 
encountered in working magnesium and its principal alloys. 

Alcoa, because of its higher costs, decided in 1927 to dis- 
continue magnesium production and to purchase its entire 
requirement from Dow. An agreement was then consum- 
mated that provided for a cross-licensing of production 
patents and for the sale of ingot magnesium to Alcoa at lower 
than prevailing prices. Alcoa, of course, became by far 
Dow's largest custom^er. 

The Antitrust Division alleges that, under this agreement, 
Alcoa hoped (1) to insure a price relationship between 
aluminum and magnesium that would not cut aluminum 
sales and (2) eventually to drive fabricators other than Dow 
out of the market/ 

In 1931 the writhing tentacles of I.G. Farben reached into 
the scene. Alcoa and the German "octopus" formed a patent 
holding company, the Magnesium Development Corpora- 
tion, in which they pooled both their production and their 
fabrication patents. I.G. Farben's production process was evi- 
dently cheaper than any except Dow's, which was based on the 
by-product material available at the Midland works. The 
Germ^an company also contributed the important sulphur 
patents covering the use of sulphur to protect the metal sa it 
was melted and cast. I.G. would have preferred to license, 

1 Bone Committee Hearings, Part 2, p. 958. 

• 106 • 

Cartels and American Security 

through the Magnesium Development Corporation, some or 
all of the pooled patents to other fabricators on a royalty 
basis, but this conflicted with Alcoa's plan for as exclusive con- 
trol as possible of the American magnesium market. Conse- 
quently, I.G. and Alcoa formed a fabricating company, the 
American Magnesium Corporation, on a 50-50 basis, and by 
entering into a five-year purchase contract with Dow man- 
aged to obtain at least as low a price on magnesium ingot as 
I.G.'s production process would have made possible. 

In the meantime, suit for patent infringement was brought 
against Dow for the presumptive purpose of "softening Dov/ 
up" for later .manipulation. At this stage, according to the 
Antitrust Division account, there still remained 

. . . two flaws in Alcoa's plan to dominate completely the mag- 
nesium market. While Alcoa purchased magnesium at such a prefer- 
ential rate from Dow that no other purchaser could compete with 
Alcoa, there was always the possibility that Dow itself might undercut 
Alcoa in its sale of fabricated products. There was the second flaw 
that Dow might license some other fabricator under the Dow 
fabrication patents. Alcoa took care of the first flaw by a provision 
in the purchase agreement with Dow which provided for a fair cost 
of fabrication.^ 

The second danger was removed by a cross-licensing agree- 
ment entered into by Dow and the Magnesium Development 
Corporation on Jan. 1, 1934. The suit for patent infringement 
had accomplished its avowed purpose and was then with- 

The magnesium situation in the second half of the 1930's 
was, then, as follows: Dow was the sole producer in the 
United States of magnesium ingot. This was not, however, 
the result of any agreement, since Alcoa, faced with Dow's 
lower-cost production, had voluntarily withdrawn from the 
field as early as 1927. The American Magnesium Corpora- 
tion and Dow were coming to be the sole fabricators. Alcoa, 
having had a half interest in the American Magnesium Cor- 

1 Bone Committee Hearings, Part 2, p. 974. 

• 107 • 

Controlling World Trade 

poration, could not increase its 4, 000- ton fabrication capacity 
without the consent of I.G. There is, however, no evidence 
that this capacity was a restricting factor; actually I.G. had a 
financial interest in increasing the tonnage output as the 
market required it. Dow was limited in its pricing policy by a 
stipulation in the 1933 purchase agreement with Alcoa that 
Dow must charge its customers a "fair cost of fabrication." 
On the other hand, Dow's fabrication charge does not appear 
to have been out of line with fabrication costs. Nevertheless, 
the licensing of production and fabrication patents to inter- 
ested outsiders was certainly limited by this series of agree- 

A consent decree, entered on Apr. 15, 1942, made available 
the pooled patents on a royalty-free basis and imposed fines 
on the participants to the agreements. There can be little 
doubt that the restraints imposed by this series of agreements 
ran counter to the general welfare and that their termination 
was sound public policy. At the same time there is no assur- 
ance that the volume of magnesium consumption in the United 
States would have been much greater had there been no 
agreements. Here again the antitrust case, insofar -as it con- 
cerns American security interests, errs by claiming too much. 

It is pointed out that German production of magnesium in- 
creased from 12,080 metric tons in 1937 to 19,000 in 1940, 
while production in the United States in the same years in- 
creased from 2,057 to 5,680 tons.^ It is suggested that Alcoa's 
dominant interest was in a price for magnesium that would 
not lead to the substitution of magnesium for aluminum, and 
the inference is that this purpose was served by the agree- 
ments. In all probability, however, the agreements are a 
minor factor in explaining the diff'erence between German and 
American magnesium development. German war prepara- 
tions were well under way in 1937, and the chief source of 
magnesium consumption was military, principally for air- 
craft. Moreover, German shortages of copper provided a 

1 Bone Committee Hearings, Part 2, p. 934. 

• 108 • 

Cartels and American Security 

strong incentive for the development of light metals, including 

Difficulties encountered in working the metal seem definitely 
to have restricted its use in the United States, and it took the 
impetus of large aircraft requirements, both here and in Ger- 
many, to overcome those difficulties. That the price relation- 
ship between ingot magnesium and aluminum was not the 
main deterrent is indicated pretty clearly by the following 
price series:^ 

Domestic Price Per Pound of Ingot, in Gents 































A shortage of magnesium developed early in the war and 
reached its most acute stage in 1942. It would seem, however, 
that the primary cause was the failure of the Army and Navy 
Munitions Board to estimate adequately military require- 
ments. Late in 1940 the estimate for 1941 was 7,000 tons and 
for 1942, 11,000 tons, both well within Dow's planned 

In the Bone Committee Hearings, Senator LaFollette was of 
the opinion that the magnesium case was "the worst case he 
had ever seen" and asked for Thurman Arnold's acquiescence. 

Said Mr. Arnold, "Well, I cannot disagree, because, of 
course, this has tied up a basic material, and I suppose that 
if we had allowed American ingenuity to operate in this basic 

^ From a pamphlet by the Dow Chemical Company, Dow and Magnesium, The 
Dow Chemical Company, Midland, Mich, (undated), Appendix 1. 

• 109 • 

Controlling World Trade 

material, we would have better houses, better automobiles, 
lighter automobiles and better airplanes. I suppose that the 
actual damage of tying up this basic material is incalculable.^ 
Mr. Arnold does not say whether the damage was in- 
calculably large or incalculably small. It is the author's 
opinion that the calculus of small numbers is more nearly 

Congressional Investigations 

The Truman Committee, in its voluminous hearings, has 
somewhat cautiously — and the Bone Committee, in its even 
more voluminous hearings, very incautiously — built up the 
view that American participation in German-dominated in- 
ternational cartels had a devastating effect on our war prepara- 
tions. The Kilgore Committee has been covering much the 
same ground, more exhaustingly, but without adding any- 
thing significantly new. These committees have covered, in 
addition to Carboloy and magnesium, international patent 
agreements relating to dyestuffs, synthetic rubber, methane, 
zinc, tetracene, communications, methanol, optical glass, 
plastics and other products and processes extensively used in 
war production. 

Although the particulars vary from industry to industry, 
the general import of the practices complained of is similar. 

Limitations oj Use oj Acquired Technology. It is true that 
patents and techniques were acquired from abroad under 
conditions that were clearly limiting as compared with their 
potential usefulness under a system of free licensing. Whether 
this technology could have been acquired under a system of 
free licensing is another matter, but certainly a substantial 
part of the limitation could be surrendered with decided 
benefit to the international exchange of technology. 

The particular effect on the war effort of limitations on the 
use of patents is a matter on which competent observers differ 
widely. In 1943 the National Patent Planning Commission, 

1 Bone Committee Hearings, Part 2, p. 968. 

• 110 • 

Cartels and American Security 

appointed by the President to inquire into the workings of the 
American patent system, reported that the relation of patents 
to the war effort "involves no serious problem." 

Existing laws permit the Government of the United States and its 
contractors and subcontractors to manufacture and use any in- 
invention, patented or unpatented, regardless of the citizenship of 
the owner, upon the payment of reasonable compensation. These 
laws operate both in peace and in war. After consulting with the 
several government departments, including the War and Navy, 
and affording them an opportunity for the presentation of evidence, 
the Commission is convinced that the existing laws are adequate to 
protect the government during the present national crisis.^ 

It was, nevertheless, the conclusion of the Truman Com- 
mittee — an able committee, ably counseled — after a careful 
examination of the agreements between Standard Oil of New 
Jersey and I.G. Far ben, with particular reference to synthetic 
rubber, that "Standard is only one of a group of companies 
producing critical materials which, by cartel agreements and 
by the subsequent control of patents, have sought to restrict 
and control production. This has constituted one of the 
greatest menaces to our war effort."^ 

The National Patent Planning Commission's statement 
that the relation of patents to the war effort "involves no 
serious problem" is, on the other hand, too sweeping. A 
patent disclosure does not mean full or ample disclosure of the 
technology involved in its use; even if it did, large-scale use of 
patent licenses by the government or on behalf of its contrac- 
tors in time of peace — which is the proper time to prepare for 
war — ^would put government in business far beyond limits 
considered desirable by those who contend there is no serious 
patent problem affecting preparation for war. If we are to 
rely on private industry in peacetime, there must be sufficient 
freedom in the acquisition and use of technology to make 
possible a quick transition to efficient production for war. 

1 The American Patent System, Report of the Commission, p. 2. 

2 2d Annual Report, p. 63. 

• 111 • 

Controlling World Trade 

Yet to those v/ho maintain that hmitation imposed by 
cartel agreements on the use of patents "constituted one of the 
greatest menaces to our war effort," it must be pointed out 
that the menace never materiahzed sufficiently to be visible 
in the statistics of war production. There is in cartel control of 
patents a problem that calls for public action, but it is not the 
major problem affecting American security. 

Division of Export Territory. An examination of the evidence 
brought out in hearings reveals that the principal object of 
American participants in international patent-exchange 
agreements was, in many cases, not the acquisition of processes 
or products but the limitation of competition, primarily 
through a division of fields. Gross-licensing agreements and 
provisions for the assignment of future patents tended to 
strengthen and perpetuate division of markets between the 
parties. Frequently such division extended to unpatented 
articles and techniques. 

Perhaps the most important and far reaching of these 
division-of-fields agreements was that consummated in 1929 
between Standard Oil of New Jersey and I.G. Farben. It 
allocated the pooled patents and techniques of both firms in 
the general chemical field to I.G. Farben for jase in any part 
of the world, including the United States, and to Standard the 
use of their com^bined patents and technology relating to oil 
and oil chemistry in any part of the world, except Germany, 
Standard thus made its oil discoveries available to Germany 
through I.G. Farben, while the latter retained control of its 
chemical processes everywhere, including the United States. 

Other agreements establish a purely territorial division of 
fields : areas assigned to the contracting parties were dependent 
on their respective bargaining strength, which in turn de- 
pended largely on the value of the technology each had to 

The principle of international division of labor extends to 
technological research with advantages, under proper pro- 
visions for use, similar to those of division of labor in pro- 

• 112 • 

Cartels and American Security 

duction. Germany, for economic and historical reasons, has 
long been technologically superior in chemistry, pharma- 
ceuticals, optical instruments and, within recent years, the 
light metals. Territorial and use limitations imposed on 
German technological information acquired by American 
firms in these fields were largely, therefore, a reflection of 
Germany's preeminence. In areas of American superiority, 
such as electrical and communications equipment, the 
limitations naturally favored the United States. In the patent- 
exchange agreement of 1931, for example, betv/een RCA, 
Photophone and ten producers and distributors of motion- 
picture sound film in this country, and two manufacturing 
companies and two distributors in Germany, the American 
companies were given exclusive rights in the United States, 
Canada, Newfoundland, Australia, New Zealand, the Straits 
Settlements, India and Russia, as against the Germans' ex- 
clusive rights in only a part of Europe.^ 

The U.S. Department of Justice case against international 
patent cartels, as presented in various Congressional hearings, 
tends to minimize the value to the United States of technology 
acquired from abroad and to emphasize the limitations put 
upon American use. Accordingly, the primary consideration 
for American firms is taken to be the elimination of foreign 
competition from the American market. Attorney General 
Biddle asks. 

Why did American firms enter into these agreements? The 
answer is simple. They did so for business reasons. They thought it 
would be better if they did not have to compete with German firms 
in the American market. . . . They hoped also to get valuable 
technical information from the German firms. This hope was not 
always realized. Unfortunately, in too many cases, the conse- 
quences were that the information went only from the American 
Company to the German firm.^ 

1 Kilgore Committee, Part 4, p. 408. 

2 Testimony before the Kilgore Committee, Aug. 29, 1944. 

• 113 • 

Controlling World Trade 

Thurman Arnold emphasizes the same point in an exchange 
with Senator Clark, before the Bone Committee/ 

Senator Clark: "Now you astonish me when you say that 
our manufacturers and industries have been since 1934 giving 
the Germans the benefit of our improvements without getting 
a quid pro quo^ 

Mr. Arnold: "Oh, they got a quid pro quo; they got stabili- 
zation of their markets in South America, and they got the 
market here. They got markets; that is what they really 

In point of fact, American firms also got technological 
knowledge, some of it enormously important for the war 
effort. The "secret cartel agreement" of 1927 between Rohm 
and Haas, Philadelphia, and ^Rohm and Haas, Darmstadt, 
brought to this country the plexiglass extensively used in both 
bombers and pursuit planes. Plexiglass was exclusively a 
German development, and despite the Nazis' Master Plan 
the patents came to this country in 1936.^ I.G. Farben's total 
contribution to the long series of developments in oil chemistry 
utilized in this country by Standard is difficult for a layman 
to evaluate, but tungsten carbide, tetracene, the sulphur 
process in magnesium production, and many other products 
and processes extensively utilized in war production would 
have to be at least in part credited to I.G. 

Along with this technological advantage there went, how- 
ever, territorial provisions dividing markets, and many other 
limitations on freedom of use. These restrictions undoubtedly 
kept United States production from attaining the level it 

1 Bone Committee, Part I, p. 645. 

2 Bone Committee, Part 2, testimony of Walter R. Hutchinson, p. 677. 
Senator Lucas: "Nevertheless, Germany permitted that patent to come to 

this country in 1936, giving us the same opportunity here to make the same type 
of glass that they were making there, from the standpoint of war production." 

Mr. Hutchinson: "Of course, it was not the cast sheet then; it was just the 
making of plexiglass." 

Senator Lucas: "But as they developed it, the Philadelphia concern obtained 
the same benefit." 

Mr. Hutchinson: "That is right." 

• 114 • 

Cartels and American Security 

might have reached had the information been freely acquired, 
and an important objective for public policy will be to devise 
means of acquiring foreign technology with a minimum of 
restriction on its use. The inference, however, that American 
participants in international patent agreements were interested 
exclusively in markets and acquired little of technological 
value runs counter to the facts. 

Protection of Enemy Interests. There was sometimes more 
involved in prewar international patent agreements than 
division of fields and restrictions on use in production. The 
agreements, on occasion, led American participants into 
actions designed to protect the interests of enemy firms during 
the war. Although the consequences on our war effort were 
seldom adverse, their long-run effects may well be inter- 
preted as contrary to American security. In certain in- 
stances. United States participants in patent arrangements 
have taken title to German-owned patents in order to keep them 
from being vested by the Alien Property Custodian. More 
frequently, United States firms have attempted to sustain 
Latin American or other foreign outlets of German cartel 
participants by supplying goods to German subsidiaries or 
agents cut ofT from Germany by the war. Whether these 
actions are considered inimical to American security interests 
depends largely on one's attitude toward the continuance of 
technical data agreements with German firms and resump- 
tion of foreign trade and business relations with Germany. 
Certain aspects of this problem are touched on in Sec. B of 
this chapter. 

The acts were a close approach to trading with the enemy in 
wartime. The applicability of the Truman Committee's 
judgment on the Standard Oil-I.G. Farben agreements tran- 
scends that particular case. While exonerating Standard's 
officials of "moral turpitude or of subjective unpatriotic 
motives," the Committee took the view that, as a result of 
these agreements, "Standard was repeatedly forced into 
situations which, taken individually and outside of the general 

• 115 • 

Controlling World Trade 

pattern of this arrangement, can be construed only as most 
compromising. ' ' ^ 

On the other hand, such conduct as this is not Hmited to 
cartel relationships, however they are interpreted, but may 
develop out of any close business relationship with firms in 
potentially enemy countries. 


Not only did German-dominated international cartels ob- 
struct American war production, but, according to the anti- 
cartel case, American participation was effectively used for 
German espionage. That sources of economic intelligence 
in the United States were diligently exploited by Germany can 
be readily admitted. What needs to be determined is: how 
valuable was this intelligence; could it have been as easily 
acquired without cartel connections; could it have been denied 
Germany without breaking off all trade relations with her; 
and, if so drastic a step were taken, what would have happened 
to our ovv^n sources of economic intelligence vis-a-vis Germany? 

The types of economic intelligence alleged to have been 
acquired by Germany through cartel connections were (1) 
published information systematically collected, (2) reports of 
secret agents, (3) data on output of particular products under 
patent licenses controlled by German firms and (4) designs 
and specifications of articles of miliary use. Germany could 
have acquired the first two types of information as effectively 
by, or under cover of, almost any sort of American subsidiary. 
Item.s (3) and (4) became available through technical data 
agreements between German and American firms, although 
such agreements may or may not have included those restric- 
tive provisions that characterize, by antitrust definition, a 
cartel. Since normal unrestricted international business re- 
lations give rise in peacetime to a flow of all four types of 
economic intelligence, it is difficult to see a special connection 
between cartels and espionage. 

1 2d Annual Report of the Truman Committee, p. 49. 

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Cartels and American Security 

One of the most active collectors of published economic 
intelligence in the United States was an I.G. Farben affiliate, 
the Chemnyco Company. Chemnyco was under contract 
with I.G. to handle patent and tax matters, maintain technical 
relations between I.G. and American firms, and provide 
economic and political reports. According to the testimony 
of Francis Biddle before the Kilgore Committee, 

In order to carry out the program of the Nazi Government, I.G» 
[here described as a combine] established a network of dummy 
companies all over the world. It used these as centers of propaganda 
and espionage. Typical of the activities of one of its American agents 
was the collection of military and geographical information which 
the German Government thought important as, for instance, a map 
of the Pacific northwest on which were located all the principal 
power developments in the States of Washington, Oregon and Idaho.^ 

The map in question was one that the Federal Power Com- 
mission automatically made available in 1 937 to any interested 
inquirer. It is difficult to understand how the acquisition of 
such information by potential enemies could possibly be 
prevented without denying it to our own nationals. There is 
no doubt that the United States makes peacetime economic 
espionage of this type particularly easy. We publish more 
voluminous statistics and circulate them more freely than any 
other country. It is, however, easy enough to acquire such in- 
formation abroad, even in Germany. Nine-tenths of what we 
knew about the German economy at the outbreak of war was 
derived from German published sources, and most of the re- 
mainder was gleaned through the interrogation of business 
men and technical experts familiar with the German economy. 

As for the activity of secret agents, cover can be and is pro- 
vided without benefit of cartel connections. Almost any kind 
of foreign subsidiary or agency can serve this purpose, and 
unless the United States is prepared to break off all economic 
and even cultural relations with foreign countries, it may ex- 
pect to harbor secret agents. Business cover for espionage will 

1 On Aug. 29, 1944. 

• 117 • 

Controlling World Trade 

exist as long as international trade is carried on, and these 
activities, therefore, are not uniquely relevant to the cartel 
problem. They have, nevertheless, played a large part in the 
antitrust case against cartels. 

Production figures on patented articles or on articles pro- 
duced by a patented process are usually received as data in- 
cidental to royalties from patent licensing. Since many 
German-owned or controlled patents were used by firms 
operating under Army or Navy contracts, information bearing 
on output customarily accompanied the royalty payments. 
The 1921 agreement between the American firm of Bausch 
and Lomb and the German firm of Zeiss, which has been ex- 
tensively publicized through Congressional hearings, pro- 
vided for royalty payments to Zeiss over a period of 25 years 
on all of Bausch and Lomb's military business.^ Zeiss patents 
and technical knowledge were put at the disposal of the 
American firm for production and sales limited to the Ameri- 
can market. As soon as the contract was made, the Army and 
Navy were acquainted with the terms relating to military 
production and appear to have been interested solely in as- 
suring the American armed services of "Zeiss quality" optical 
instruments. There is no evidence that instrument designs of 
a secret military nature were transmitted from Bausch and 
Lomb to Zeiss, and after 1935 lump-sum royalty payments 
were devised to conceal information on the output of in- 
dividual items. Undoubtedly, under such an arrangement, a 
certain amount of information relevant to American military 
output must still have been available to Zeiss. 

Since the Zeiss-Bausch and Lomb agreement also allocated 
market territory and otherwise limited the use of cross- 
licensed patents, it constituted, ipso facto^ a cartel. But any 
international technical-data or patent-licensing agreement 
is bound to make available to the respective parties a knowl- 

1 Wendell Berge's testimony before the Kilgore Committee, Sept. 7, 1944, was 
largely devoted to a summary of the relations between Zeiss and Bausch and 

• 118 • 

Cartels and American Security 

edge of the other's capacity and output; the problem is not 
limited to cartels. Unless we prohibit the use of technical 
knowledge acquired from abroad, it will be impossible to close 
this loophole to potential enemies. 

International technical agreements covering articles and 
processes of actual or potential military use often call specifi- 
cally for the exchange of designs and operating and production 
data. The Bausch and Lomb-Zeiss agreement was of this 
type, and so were many others. Agreements to which particu- 
lar attention has been paid were those between the American 
Bendix Aviation Corporation and the German Siemens 
Apparate und Maschinen, both producers of aviation com- 
ponents; the American Bosch Corporation and the Robert 
Bosch Company of Stuttgart, specialists in fuel injection 
systems; and the American Sperry Gyroscope Corporation 
and the German Askania Werke, both makers of gyroscopes, 
automatic pilots and other aircraft precision instruments. 
Since these and many similar technical-data and patent agree- 
ments involved limitations of one sort or another on the use of 
acquired technical data, they fall within the antitrust definition 
of cartels. Yet technical data agreements without these 
limitations, washed clean of any cartel taint, would still con- 
stitute a channel for the transfer of technical information of 
military value to potential enemies. 

The Army and Navy can, of course, and on occasion do, 
commit their contractors and subcontractors to secrecy re- 
garding particular products and processes, although they may 
possibly not have demanded sufficient disclosure of the foreign 
relationships of their supplying firms. It would appear, how- 
ever, that if espionage is to be prevented, the Army and 
Navy will have to maintain closer control of the activities and 
international connections of military contractors. The actual 
cartel characteristics of these international connections have 
very little discernible relationship to espionage. 

In this, as in other approaches to the cartel problem, the 
U.S. Department of Justice case: (1) begins with a condem- 

• 119 • 

Controlling World Trade 

nation of restrictive cartel practices and then, by failing to 
distinguish between cartels and other types of business arrange- 
ments, ends with an implicit condemnation of almost any kind 
of foreign business transaction; and (2) begins by centering 
attention on the restrictive aspects of patent-exchange agree- 
ments and ends by implicitly condemning almost all inter- 
national technical data agreements. 

^^ Germany s Master FlarC 

German-dominated cartels are alleged not only to have 
limited America's war production and fostered systematic 
espionage but also to have encouraged fifth-column and 
sabotage activities, engaged in psychological warfare and in 
other ways weakened and harassed Germany's potential 

This, "Germany's Master Plan," was officially outlined by 
Francis Biddle, testifying before the Kilgore Committee:^ 

It was the theory of the German Government that operating under 
the guise of ordinary commercial arrangements, these firms could be 
used to weaken Europe and America so that when the military war 
was resumed, we should lose. Through the techniques of industrial 
penetration, they hoped to be able to cripple American production, 
to gain from us technical know-how, to conduct espionage upon us, 
and to establish centers of propaganda throughout the world. 

These activities were sometimes carried on not by cartels 
but by combines. The motto of the U.S. Department of 
Justice in such cases appears to be, "If it isn't a cartel, it's a 

The author has been unable to discover any document in 
which the German government expressed the theory de- 
scribed above, or any set of directives adopted for its imple- 
mentation. Also, it is difficult to see how Germany could 
have expected to use ordinary business transactions, implying 
a quid pro quo, to get all of the quo without supplying some of 

1 Aug. 29, 1944. 

• 120 • 

Cartels and American Security 

the quid. Unless one accepts the whole set of limitations under 
which patents were licensed and technology exchanged — all 
explicable on purely commercial grounds — as evidence of a 
German political plan, the evidence is extraordinarily thin. 
It consists chiefly of a few instances in which German firmSj 
at the request of, or out of fear of, the German government, 
refused to supply, or delayed the supply of, technical informa- 
tion they were obligated by contract to deliver. The most 
plausible, and perhaps the most important cases concerned 
data on buna, a synthetic rubber controlled by I.G. Farben, 
and the automatic aircraft pilot, controlled by Siemens 
Apparate und Maschinen, Against these and a few other 
examples would have to be put the very large number of 
potential and actual technical processes, useful in war pro- 
duction, acquired from Germany by American firms. 
• Another piece of evidence, often quoted and extensively 
relied on, is the remark of Dr. Meinhardt, chief of the German 
Osram Company: "An international cartel has no right of 
existence and a German business man has no right to become 
a member of such a cartel if this cartel is acting against the 
common interest of Germany." 

There are probably American or English business men who 
would subscribe to the same patriotic sentiments. 

There can be no doubt that the Hitler government suc- 
ceeded in effectively bending German enterprises, large and 
small, to the purposes of the state. There is also no doubt that 
German business connections abroad were extensively used 
for espionage and psychological warfare. In this, German 
practice did not differ markedly from that of other countries, 
including some democracies, though it was probably more 
aggressive and effective. But the theory that Germany had 
high expectations of weakening her enemies through ordinary 
business transactions including cartels, or that these trans- 
actions need any explanation other than that supplied by 
business considerations, is not strongly supported by the evi- 
dence. A consideration of Germany's preparations for and 

• 121 • 

Controlling World Trade 

conduct of war points to the conclusion that Hitler's Reich 
did not put much stock in economic warfare, particuarly of 
the type just discussed. 

Although America's preparations for war may in a few 
instances have been adversely affected by American participa- 
tion in international cartels, and although it behooves us to 
know more about the terms of international business agree- 
ments consummated in future, these are security problems of 
relatively small magnitude. Recent cartel discussions, however 
have emphasized another aspect of security to which we now 


If preparation for war is one way to approach security, an 
attempt to avoid war by eliminating or neutralizing sources of 
military aggression is the other. It will, therefore, be relevant 
to determine what relation exists, if any, between private 
monopoly, including the cartel form, and military aggression. 

Victory over Germany has confronted us and our Allies 
with the necessity of deciding what is to be done with Ger- 
many's foreign economic controls, including cartel connec- 
tions, and with industrial facilities within Germany. What- 
ever is done will affect the international cartel system. Our 
primary interest in the determination of these policies is, how- 
ever, a security interest, specifically, the minimizing of future 

Confiscation of German-acquired property in occupied 
Europe will automatically sever the contractual and cus- 
tomary relations between German and outside firms on which 
Nazi control of the industry of the continent depended. This, 
as former Secretary Biddle points out, "will be no minor task 
because their methods of concealing control are many."^ 
Not only will Nazis be eliminated from positions of economic 
as well as political power, but the destruction of military 
facilities in Germany will affect many properties in the 

1 Testimony before the Kilgore Committee, Aug. 29, 1944. 

• 122 • 

Cartels and American Security 

chemical, aviation, electrical equipment and other in- 
dustries in which Germany's cartel position was dominant. 
If the basic security decision is to make Germany weak, further 
drastic reduction of the heavy industries may be called for. 
If, on the other hand, the ultimate security objective is the 
emergence of a prosperous but nonaggressive Germany, 
destruction of industrial facilities should be relatively limited. 

If the latter decision prevails, Germany may be expected 
eventually to reestablish her foreign trade and become again 
the leading industrial country of the continent, excluding 
Russia. Would Germany then resume her international cartel 
connections and the high degree of monopolistic concentration 
in her domestic industrial organization? Specifically, will 
United States security require inclusion in the peace settle- 
ment of prohibitions against the restoration of Germany's 
international cartel connections and of measures designed to 
lessen or control domestic monopoly power? 

The U.S. Department of Justice has been considering this 
aspect of the security question, but its program to date is, 
perhaps inevitably, vague. In testimony before the Kilgore 
Committee, Biddle and Berge have emphasized, as important 
objectives, confiscation of the foreign assets of German firms, 
the acquisition, without limitation as to use, of German patents 
and technology both present and future, and the breaking up 
of German internal monopolies.^ 

1 For example, Wendell Berge's testimony (Sept. 7, 1 944) suggests the follow- 
ing security program: "(1) We must acquire, as soon as possible, patents and 
technological know-how which the German firms acquired during the war years 
and in preparation for this war. ... (2) In the future, the work of such 
laboratories as will continue to exist must be made available to firms on a 
general basis in this country. The Germans have made a habit of using their 
know-how as a means toward military domination. As a national security 
matter alone, the German laboratories which continue to exist must operate in 
full view of the rest of the world and with adequate safeguards so that their dis- 
coveries cannot be kept secret. (3) We must break up the German firms. They 
must be forced to disgorge the securities and stocks of companies all over the rest 
of Europe and they must not be allowed to exist as powerful monopolies within 
Germany. (4) Some German firms probably ought to be physically removed from 
Germany and their laboratories internationalized." 

• 123 • 

Controlling World Trade 
International Cartels as a Medium of Aggression 

It is not obvious that international private business agree- 
ments, dividing world markets, fixing prices, limiting output 
and engaging in other market-regulating activities, are more 
a source of international tension than unregulated competition. 
The monopoly power of cartels has, it is true, been used in un- 
fair competitive practices of a type destined to provoke 
national resentment. Local enterprises in Latin American 
countries have been stifled by the price-cutting threats of 
foreign combines and cartels,^ while small competitors have 
everywhere been driven from markets. The German Stahl- 
werksverband, working through the international steel cartel, 
attempted, though unsuccessfully, to prevent the establish- 
ment of an iron and steel works in Greece.^ Indeed, to combat 
the unfair competitive practices of foreign cartels was one of 
the principal objectives of the Webb-Pomerene Act. 

Unregulated competition, on the other hand, has been 
similarly productive of national resentment and has fre- 
quently led to governmental action designed to curb its real 
or fancied excesses. In the postwar period, the competitive 
strength of American exports is likely to create at least as 
much apprehension and resentment abroad as the machina- 
tions of foreign cartels will arouse in the United States. 

The real hazard to international security in the cartelization 
of world trade lies in the cooperation of governments with 
business in the exploitation of foreign markets. The fact is 
that, except in the United States and perhaps a few other 
countries, a close connection generally exists between foreign 
trade and foreign policy, and the power of the state is ex- 
tensively relied on for the promotion of export interests. 
Since a large part of the foreign trade of most European 
countries is cartelized, the export firms and associations rely 

1 See Corwin Edwards, Economic and Political Aspects of International Cartels, 
(Kilgore Committee), 78th Congress, 2d Session, 1944, Monograph 1, pp. 47-49. 

2 Kilgore Committee, testimony of Francis Biddle. 

• 124 • 

Cartels and American Security 

on their governments not only to protect the domestic market 
but to secure for them as large a quota as possible in the total 
business of the cartel. The activities of the British govern- 
ment in facilitating the British steel industry's participation 
in the international steel cartel are illuminating. 

As governments begin to take an active part in negotiating 
cartel agreements, in coercing domestic firms into cartel 
participation and in policing and protecting national cartel 
members, considerations of foreign policy and national pres- 
tige intervene in what were formerly purely business arrange- 
ments. The power of the state is used in negotiation to 
obtain a position in world markets that could formerly be 
achieved only through business competition. The next 
logical development is the joint action of two or more states on 
behalf of their export interests as against those of a third state. 

Such action was implicit in the so-called Dusseldorf agree- 
ment between governmentally encouraged German and 
British business men in the period just before the war — and the 
implications were dangerous. In March, 1939, the Federa- 
tion of British Industries and the Reichsgruppe Industrie, top 
industrial associations in both countries, met in Dusseldorf, 
under government sponsorship, to work out means of lessening 
competition between German and British exports. Mr. R. S. 
Hudson, Parliamentary Secretary of the Department of Over- 
seas Trade, took an active part in the negotiations, and his 
view of their significance is interesting. It was Mr. Hudson's- 
opinion, as reported in the press, that the day of the individual 
trader is over, that world markets should be divided and 
regulated by private agreement, and that an agreement like 
that contemplated with Germany should be negotiated with 
other European countries. 

The conference at Diisseldorf concluded with a twelve-point 
agreement, of which three paragraphs are worth quoting here: 

5. The two organizations are agreed that it is desirable that in- 
dividual industries in both countries should endeavor to arrive at 
industrial agreements which will eliminate destructive competition, 

• 125 • 

Controlling World Trade 

wherever occurring, but prices must be fixed at such a level as not to 
diminish the buying power of the consumers. 

6. The two organizations realize that agreements upon prices or 
other factors between Germany and Great Britain are only a step, 
though a most important step, toward a more ordered system of 
world trade. They would welcome the participation of other nations 
in such agreements. ... 

8. The two organizations realize that in certain cases the ad- 
vantages of agreements between the industries of two countries or of 
a group of countries may be nullified by competition from the in- 
dustry in some other country that refuses to become a party to the 
agreement. In such circumstances, it may be necessary for the or- 
ganizations to obtain the help of their governments and the two or- 
ganizations agree to collaborate in seeking that help. 

As it happened, Mar. 14, the day before the conference 
convened, was the date of Hitler's march into Czechoslovakia, 
and on Mar. 21, Hitler declared that the Czechoslovak nation 
no longer existed. In view of these developments. President 
Stanley of the Board of Trade felt constrained, on Mar. 28, 
to announce to the House of Commons that "at the present 
moment further progress [of the Diisseldorf negotiations] is 

It is doubtful whether, apart from the march of contem- 
porary events, the British government would ever have 
accepted and implemented the Diisseldorf agreement, since its 
political implications vis-a-vis the United States were obvious, 
and soon denounced.^ Nevertheless, the pattern of inter- 
national trade regulation it suggested is by no means dead. An 
international cartelization agreement embracing a larger 
number of countries and enjoying a greater measure of govern- 
mental support is a very possible development in postwar 
European trade. 

The security implications of such a system of trade regula- 
tion depend largely on whether an extension of govern- 

1 The London Economist^ in an adverse comment on the agreement, wondered 
whether there is anything "in the atmosphere of Diisseldorf that causes sensible 
men to lose their wits." 

• 126 • 

Cartels and American Security 

mentally negotiated and supervised cartel agreements might 
lead, through a partial surrender of national sovereignty, to an 
international organization regulating imports and exports 
without undue regard to areas of origin and destination, or 
whether such a process would leave sovereignties unimpaired 
and merely widen the domain within which considerations of 
power and national prestige are permitted to dominate 
business interests. 

At Bretton Woods a promising start was made toward 
international postwar monetary cooperation, although the 
plan accepted by the experts carefully safeguards the freedom 
of action of participating governments. Both the Food and 
Agriculture Organization and the International Labour Office 
have proposed an international organization to administer 
commodity agreements. The Proposals recently published 
by the U.S. Department of State wisely subordinate com- 
modity controls to the broader ministrations of an Inter- 
national Trade Organization. It is probable, moreover, 
that if such an organization is established, certain agreements 
of a cartel character, as in tin and rubber, will come under its 
jurisdiction. It is not yet clear, however, to what extent 
these and other experimental approaches to international 
economic planning would impinge on national autonomy, nor 
is it possible to predict how well they would withstand the 
strain of a serious conflict of interests among participating 
nations. International cooperation in these areas, however 
successful, does not presage the success of intergovernmental 
sponsorship and regulation of cartels. Effective cooperation 
in this field would require, at a minimum, a similarity of aims 
among the participating nations and a similar attitude toward 
the relationship of government to business. But even this 
minimum requirement is not likely to be satisfied. On 
monopoly and competition, and on the position of private 
enterprise, the countries of the Western Hemisphere differ so 
sharply from the nations of Western Europe that a policy of 
international cartelization, under whatever degree of govern- 

• 127 • 

Controlling World Trade 

mental control, seems altogether impracticable. Feasible or 
not, the intervention of governments in cartel manipulation 
would be more likely to exacerbate than to alleviate inter- 
national tensions. 

On this point the author would agree with Professor Viner's 
dictum that, "When governments are also conductors of 
economic enterprise in the international field, what results is a 
pattern of intergovernmental relationships in which economic, 
political and military bilateral-monopoly-plus-duopoly are all 
wrapped up in one package of international dynamite."^ 

If an international cartel policy is to contribute to inter- 
national security, then it had better be based on an agreement 
to prohibit restrictive cartel practices rather than on an agree- 
ment to sponsor and regulate. As for Germany's resumption 
of her war-disrupted international cartel connections, it may 
be pertinent to suggest that what the Allies can accomplish in 
the way of cartel policy by voluntary agreement among them- 
selves will determine what can be enforced on Germany by 
compulsion. If Great Britain and the United States should 
jointly decide to prohibit restrictive cartel agreements, there 
is every reason to believe that this policy could be imposed 
on Germany through the peace settlement, and that Russia 
too would support it. If, on the other hand, the countries 
of Western Europe resume their own prewar international 
cartel connections, it will not be possible for long to keep 
Germany out — nor would these countries want to. 

Domestic Cartels in Germany as a Source oj Military Aggression 

Germany, even before the advent of the Nazis, was the 
most highly monopolized capitalist economy in the world. 
Cartelization of German industry virtually coincided with the 
emergence of Germany as an industrial country. The Ger- 
man courts have always recognized cartel agreements to be as 

1 Jacob Viner, "International Relations between State-controlled Na- 
tional Economies," American Economic Review, Supplement, Vol. XXXIV, No. 1, 
Part 2 (March, 1944), p. 319. 

• 128 • 

Cartels and American Security 

enforceable as any other contracts, and even before the First 
World War the power of the state was used to compel cartel- 
ization. Typical of German official opinion was the judgment 
of the Bavarian Supreme Court, expressed 1888, that "it is 
incumbent upon prudent business men belonging to a branch 
of industry which is suffering from a depression to get together 
and enter into agreements regulating the ways and means of 
operating their industry with a view to promoting recovery." 

The First World War increased the extent of industrial con- 
centration in Germany as it did in this country. Postwar 
inflation seriously damaged small-scale and uncartelized 
German industry, and the period of large-scale borrowing 
from abroad, following inflation, saw a further expansion of 
firms already large enough to take advantage of these borrow- 
ing opportunities. When the Nazis came to power, the 
process of Aryanization further depleted the ranks of small- 
scale enterprisers. Cartels were reduced in number through a 
process of consolidation that expanded their coverage and the 
extent of their controls over individual firms but at the same 
time disciplined them to the uses of the developing Nazi war 
economy. Heavy armament expenditures of the 1930's 
accelerated the growth of German combines in much the 
same way as they promoted the growth of large-scale Ameri- 
can enterprise in the 1940's. 

At the outbreak of the war, about thirty large German 
combines were responsible for most of the output in aircraft, 
nonferrous metals, chemicals (which included explosives, 
synthetic fibers, oil, rubber and plastics), communications 
and electrical equipment, optical instruments, iron and steel 
and their fabricated products. These industries accounted 
for the bulk of war production. The principal combines, 
along with the rest of German industry, were closely organized 
into about 500 cartels that, by that time, were not merely 
commercial market-regulating agencies but units in a govern- 
mentally directed war economy. 

Cartels are clearly a deep-rooted German institution. At 

• 129 • 

Controlling World Trade 

no time has an anticartel movement of serious proportions 
emerged in Germany. Pre-Hitler trade unions and the 
Social Democratic party, far from opposing cartels and com- 
bines, always regarded them as a stage "higher" in evolution 
than unregulated market competition and closer to the 
institutions of a socialist state. 

The connection between industrial monopoly and military 
aggression appears to be clear and simple to many anticartel 
Americans. As they express it, "The cartels made Hitler 
and Hitler made war." The remedy, by this analysis, would 
appear equally simple. Break up the cartels and combines, 
and eliminate the sources of German aggression. The only 
less simple Marxian remedy would go considerably further 
than any anti-monopoly program. In the author's opinion 
postwar Germany is historically conditioned to move in the 
Marxian direction rather than in the direction envisaged by 
Senator Kilgore. « 

There exists, nevertheless, an indirect, and not unimportant, 
connection between industrial monopoly and foreign aggres- 
sion. Business concentration, by increasing the political 
vulnerability of all business, and by inducing extremist views, 
makes it more difficult for a private-enterprise economy to 
survive in a democratic environment. German big business 
not only financed the Nazi party but supplied it, by merely 
existing, with the arguments that Hitler found most effective 
in rallying the German masses; the latter was by far the more 
important contribution. Then, too, the effect of monopoly 
on the distribution of income, by increasing the supply of 
investible funds while restricting investment opportunities, 
serves to aggravate domestic unemployment, thus emphasizing 
the importance of an aggressive foreign expansion. Once 
assured governmental support, in an anti-democratic political 
environment, German business had recourse to the power of 
the state in promoting its export interests, and the Nazi state, 
in turn, had access to the foreign connections of German firms 
in promoting its political program. 

• 130 • 

Cartels and American Security 

This interrelation between industrial concentration and 
external aggression ripened, however, in a particular German 
environment. At one extreme a deep-seated military tradi- 
tion was fostered by a reactionary governmental bureaucracy 
and a state-supported junkerdom, while at the other a rootless 
and feeble democracy was unevenly pitted against world 
depression and a fanatic anti-democratic revolutionary 
movement that exploited the fears of the unemployed and of 
an impoverished middle class and the resentment of a defeated 
people. Industrial concentration was only one element in 
this situation. It was by no means the most important. 

The United States, for a period of indeterminate length, 
will participate with its Allies in the military government of 
Germany. At some point they will negotiate a settlement 
that may include terms affecting the structure of the German 
economy. Apart from punitive measures and those designed 
to destroy Germany's military power, our objective will 
presumably be to bring about, so far as we are able, an 
elimination or weakening of the sources of German aggression. 
What policies toward German domestic cartels and combines 
are required to achieve this objective? 

It may be assumed that a policy of de-Nazification will 
remove at least the prominent party members and party 
sympathizers from positions of economic as well as political 
power. Military government might further suspend or 
abrogate all cartel agreements, and take possession of all 
central cartel offices and files. With combines, military 
government might proceed by breaking up the properties, 
dividing ownership in the same manner as was done with 
Standard Oil of New Jersey. In certain cases, combine 
property is public property and ipso facto administrable by 
military government authority. Apart from its acceptance 
or nonacceptance by our Allies, such an anti-monopoly policy 
would be certain to disrupt trade channels and greatly com- 
plicate the problem of military government. Under Hitler, 
cartels in Germany were a part of the governmental machinery 

. 131 • 

Controlling World Trade 

of materials allocation, procurement and price control. If 
they are not to continue in that function, military government 
will have to devise a substitute mechanism. 

If any permanent anti-monopoly policy could be put into 
effect during the period of Allied occupation, the disruption 
and disorder incident to its application would count for little. 
Of all the institutions and policies known to history, however, 
those imposed by victors on a vanquished enemy are likely to 
be the most impermanent. The only lasting structural 
changes that can be made in the German economic and 
political system will have to be made, in the absence of con- 
tinuous occupation, by the Germans themselves. Occupation 
forces can, after a fashion, keep things running in accustomed 
channels; they can eliminate individuals, destroy or build 
material installations. They cannot, however, by law or 
edict, establish domestic institutions guaranteed to outlast 
the departure of the last foot soldier from enemy soil. 

It is equally improbable that alterations in the structure 
of the domestic German economy could, with any success, be 
imposed through a peace settlement. If the Allies pursue a 
thoroughgoing policy of de-Nazification, the chief obstacles 
to a realignment of political forces in Germany will have been 
eliminated. It is on such elements as may thereafter come to 
power that the United Nations will have to rely for changes 
holding any expectation of permanence. The political forces 
that will, in fact, come to power in Germany, may be expected 
to deal effectively with the problem of private monopoly, but 
not by an anti-monopoly policy or by antitrust procedures. 
The kind of German competition we shall eventually face 
in world markets will not, in the author's opinion, be that of 
I.G. Farben, Krupp and Siemens-Schuckert. Rather will 
it be the competition of German state trading monopolies. 
Whether these are more or less conducive to aggression than 
the prewar cartels remains to be seen. 



Intergovernmental Commodity Agreements 


Tt IS becoming increasingly necessary for public policy to 
-*- take into consideration the conditions surrounding pro- 
duction and use of particular raw materials. National 
commodity policy must frequently anticipate probable reper- 
cussions of proposed lines of action on foreign interests. Less 
frequently, sporadic or continuous consultation with foreign 
governments on commodity problems and policy will pave 
the way for concerted action in the form of an international 
commodity agreement. From this point on we shall be 
primarily concerned with intergovernmental commodity 
agreements; but it must be understood that such agreements 
form only a part of intergovernmental action affecting 
particular commodities, and that national commodity policy 
covers a still broader area. 

The United States is already party to two agricultural 
commodity agreements — those covering sugar and coffee — 
and a number of fishing agreements. We are a signatory 
of the Draft Wheat Agreement and are in process of negor 
tiating two other proposed agreements covering oil and cotton. 
A so-called "study group" has been formed, with representa- 
tion from the United States, Great Britain and the Nether- 
lands East Indies, to consult on the rubber situation. More 
active collaboration may be expected as the disposition of our 
synthetic rubber plants and the opening up of natural rubber 
areas in Southeast Asia create new problems. 

This government now holds large surplus stocks of raw 
materials produced for war purposes; in the disposal of these 
surpluses, as well as of excess production capacity in alumi- 
num, magnesium, nitrogen and other materials, we may find 
it advisable to enter into consultative and perhaps concerted 
action with other governments. 

• 135 • 

Controlling World Trade 

Since, in a whole group of strategic materials, American 
sources of supply are inadequate or failing, an attempt may be 
made to enlarge them by exploration, the acquisition of con- 
cessions, and investment in raw material installations abroad. 
Here we may encounter other powers also seeking supplies of the 
scarce materials, and on occasion ,the conflicting interests may 
be reconciled by intergovernmental negotiation. This in fact 
is the primary purpose of the proposed oil agreement. 

Our domestic agricultural policy is now oriented in the 
direction, of supporting, at extremely high levels, the prices 
of basic farm products. To maintain customary export 
markets in the face of high domestic prices, Congress has 
ordained a policy of export subsidy. To mitigate foreign 
retaliation, however, limits will probably have to be set on 
the amount of the subsidy and the quantity of exports sub- 
sidized. One way lies through division of the foreign market 
with other countries by intergovernmental commodity agree- 
ments. Although revision of domestic agricultural policy 
along the lines suggested in the GED report^ would not only 
remove this particular incentive to restrictive agreements but 
would enormously strengthen our hand in negotiating for a 
reduction of international trade barriers, it still would not 
entirely relieve us of the need to formulate a policy directed 
toward intergovernmental control of farm commodities. Cer- 
tain of the prewar agricultural-surplus problems will persist 
in the postwar period. No conceivable change in policy 
either here or abroad will exorcise, for example, immediate 
surpluses of wool and cotton, or a future surplus of sugar. In 
the absence of intergovernmental control, disposal of these 
surpluses by individual governments is likely to take forms 
extremely disruptive of international trade. 

It can be seen therefore that, regardless of any change In 
domestic agricultural policy, the combined forces of existing 
commitments, the accumulation of war-induced surpluses 

1 Research Committee of the Committee for Economic Development, Agri- 
culture in an Expanding Economy, New York, December, 1945. 

• 136 • 

Summary oj Findings and Recommendations 

and production capacity, the near exhaustion of domestic 
sources of strategic raw materials and the persistence of cer- 
tain chronic agricultural surpluses will impel us to the formu- 
lation of a national com^modity policy, frequently in concert 
with other interested countries. Whatever action we take 
with respect to particular commodities should be consistent 
with, or at least not in conflict with, the main objectives of our 
foreign economic policy. Two objectives, to which we are 
already extensively committed, are the facilitating of foreign 
investment, both public and private, and the reduction of 
trade barriers. The broad outlines of the foreign economic 
policy to which the author is willing to subscribe are admirably 
traced in the CED report on international trade policy.^ 

Although a defense of the lines of action there proposed lies 
outside the scope of this report, two considerations relating to 
our commercial policy in general and one that bears on our 
trade in raw materials in particular must be emphasized. 
The dominant economic consideration that should govern 
our commercial policy is that the United States will be, on 
a very large scale, a creditor country. If we are to be paid, 
and if other countries intend to honor their obligations, a 
primary requirement must be the attainment of a large and 
stable volume of multilateral trade. Our dominant political 
consideration should be to prevent the creation of security 
blocs and spheres of influence. Both considerations, eco- 
nomic and political, weigh heavily on the side of maximum 
reduction of international trade barriers. They are weighted 
further, as regards trade in raw materials, by the fact that, on 
balance, the United States' consumer interest in imports far 
exceeds her producer interests in exports. Even at low levels 
of national income, our raw material imports exceed our 
exports. This import balance rises rapidly with an increase 
in national income until, at high income levels, it is very large 

1 Research Committee of the Committee for Economic Development, Inter- 
national Trade, Foreign Investment, and Domestic Employment, New York, May, 1 945. 

• 137 • 

Controlling World Trade 

Obviously, then, American interests in the field of com- 
mercial policy can be said to point very strongly in the direc- 
tion of reducing discrimination and barriers to trade. This 
assumption underlies the recommendations on commodity 
policy set forth below. 

International Commodity Consultation 

American policy regarding a number of important inter- 
national commodities should have the advantage of United 
States representation in an international commodity group. 
One such group has already been established for rubber. The 
proposed oil agreement contemplates a permanent inter- 
national petroleum council open to accession by all interested 
countries. A study group has been established for concerted 
action on cotton. Any one of these groups has as its function 
not only the gathering of data on production, consumption, 
prices and stocks but also the appraisal of the effects of 
alternative courses of action on the commodity in question. 
Any nation's plans for disposal of surplus stocks, for handling 
synthetic production capacity and for acquiring sources of 
scarce materials will affect the economic and political interests 
of other countries. Establishment of machinery for periodic 
or continuous intergovernmental consultation on special 
commodity problems is therefore highly desirable. When a 
control scheme appears to be necessary, the study group is the 
proper agency to prepare the intended action. To the com- 
modities already named, one might properly add copper, tin 
and nitrates as suitable subjects of international consultation. 

Disposition of Synthetic Capacity 

The prospects for control of nitrates and rubber, two impor- 
tant international commodities, have been drastically altered by 
the wartime construction of synthetic plants in the United States. 
So far as security goes, protection of our interests requires the 
continued operation of a fraction of this capacity, but it would 

• 138 • 

Summary of Findings and Recommendations 

be a mistake to let the security argument persuade us to main- 
tain high-cost domestic production at the expense of imports 
of the natural material. Although, for reasons explained 
elsewhere in this report, American participation in an inter- 
national nitrate control scheme appears neither necessary nor 
advisable, it may prove more difficult in the case of rubber to 
establish a tolerable working balance between synthetic and 
natural production without some considerable degree of 
intergovernmental collaboration. In any future rubber 
control schemes, our potential synthetic capacity should assure 
us of a predominant influence in promoting greater stability 
and a lower level of prices. 

Expansion of Consumption versus Restriction of Production 

So far as possible, in disposing of chronic surpluses, inter- 
governmental action should be directed toward expanding 
consumption. It must be recognized, however, that the 
possibilities of increasing consumption by one-commodity 
regulation are distinctly limited. A properly functioning 
commodity agreement should embrace not only the investiga- 
tion and promotion of new uses but the expansion of consump- 
tion among lower-income groups by two-price or other plans. 
The Brussels Sugar Convention of 1 902 provided a model for 
reduction of trade barriers and subsidies to high-cost pro- 
duction, by international agreement. The commodity agree- 
ment, however, is not too useful a device for tariff" and quota 
revision, as more recent instances have shown. If barriers 
to trade are to be reduced by international agreement, all 
imports, exports and the whole range of commercial policy 
devices must be brought under consideration. And if the 
consumption of a particular commodity is to be increased by 
measures other than a reduction of trade barriers, the neces- 
sary action will have to go considerably beyond one-com- 
modity planning. 

The role of commodity agreements in effecting a more 

• 139 • 

Controlling World Trade 

tolerable adjustment of supply to consumption tends prin- 
cipally toward restricting supply rather than expanding 
consumption. Although devotees of international raw 
materials planning see in commodity controls a device for the 
expansion as well as contraction of output, it should be noted 
that raw material production responds very satisfactorily to 
rising prices without benefit of control. 

Conservation by Commodity Agreement 

Conservation of natural resources, though ostensibly an 
objective in most commodity agreements, has been directly 
approached only in those regulating fishing. Here the fact 
that the resource is definitely exhaustible and subject to the 
control of no one country makes it necessary to limit the catch 
by international agreement if a continuous yield is to be 
assured. So far as the author is aware, however, this com- 
pulsion to agreement is confined to the fishing industries. In 
all other raw material production, natural resources are 
under the control of particular countries, and their conserva- 
tion is within the competence of individual governments. 

There is no doubt that in many mining operations the 
stabilization of prices either at, or somewhat above, the com- 
petitive level would facilitate conservation. For most min- 
erals, however, price stabilization could be accomplished 
only by extensive bufi'er-stock operations within the frame- 
work of an international agreement apportioning export and 
production quotas. The concentration of control in mining 
would very possibly defeat such an attempt unless a consider- 
able degree of governmental intervention were used to prevent 
the benefits of output restriction and bufi'er-stock operations 
from being funneled into corporate treasuries. 

To undertake the control of output and prices by inter- 
governmental commodity agreement in order to accomplish 
some degree of conservation seems at best a dubious procedure. 
Conservation can be cited as an additional advantage if 

• 140 • 

Summary of Findings and Recommendations 

controls are necessary for other reasons, but, except for the 
international fishing industries, it is rarely, if ever, sufficient 
in itself to justify control. 

Worker-owner Industries versus Large-scale Production 

Basic to any public policy formulation on intergovernmental 
commodity agreements is the distinction between the highly 
competitive worker-owner production typical of agriculture 
and the large-scale production characteristic of most mining 
operations. Not only are labor resources relatively more 
important in the former, but variations in the price of the 
product are reflected directly in higher and lower labor 
incomes. Agricultural output responds slowly to increased 
prices, but once expanded it is extremely difficult to contract. 
Even in the face of very large price variations, the absence of 
monopoly elements, the impossibility of adequate cost 
calculation and the immobility of resources combine to make 
output stable. The difficulty of regulating output, the direct 
dependence of worker income on price, and the large number 
of workers employed together create a case for governmental 
controls. Almost nowhere in the extractive industries is 
there a comparable need for such government intervention to 
minimize price instability and maintain income adversely 
affected by persistent overproduction. 

The argument that would limit l^o agricultural products 
such intergovernmental restrictive agreements as may be 
necessary is strong. But there are at least two metals, copper 
and tin, for which international control, with American 
participation, may well be desirable. Current copper stocks 
are huge, and scrap yields over the next few years will be 
sufficient to meet a very large part of total copper require- 
ments. Production facilities were expanded during the war 
in all the important copper-producing areas of the world. 
The United States could take care of its own surplus by large- 
scale stockpiling and could permit domestic mining operations 

• 141 • 

Controlling World Trade 

to continue behind an adequate tariff barrier. However, not 
only are United States costs high, but our reserves of 
this extremely important war material are rapidly dwin- 
dling. Our own interests, therefore, as well as the desirability 
of sharing with other copper-producing countries the burden 
of surplus disposal and the scaling down of output, would seem 
to dictate a policy of participation in some sort of international 
copper control. 

The case for participation in a tin agreement is very differ- 
ent. Here the operation of a control scheme is inevitable, and 
the only question is whether and on what terms the United 
States, as the principal consumer, will be allowed to share in 
the control. Not only in our own interest but in that of 
bringing tin control within the framework of a general 
international commodity organization, should we press for the 
most effective participation possible. 

It was recommended in the first part of this report that the 
influence of the United States be cast in favor of a strong anti- 
cartel policy. If this course were followed, there would be 
few areas other than agriculture in which the imposition of an 
international control scheme could be justified; and in these 
few, of which tin and copper may be taken as examples, it is 
recommended that the control be public rather than private. 
In the absence of an effective anticartel policy, however, it is 
almost certain that attempts will be made to apply the old 
prewar cartel remedy to a postwar situation of excess capacity 
and fluctuating demand for raw materials and manufactured 
products. But the inevitability of restrictive agreements of 
some kind does not, in our opinion, justify an attempt to make 
these agreements public. Intergovernmental controls tend 
to be more effective, more durable and more rigid than pri- 
vate cartel arrangements. Yet monopoly challenged by 
periodic collapse, competition of outsiders and pressure of 
low-cost insiders for a larger share of total output is probably 
preferable to a comprehensive and inevitably inflexible 
government control scheme, except in those rare situations 

. 142 • 

Summary of Findings and Recommendations 

in which restriction of output by intergovernmental agreement 
is necessary to prevent even more disruptive unilateral 

Quota Schemes 

Prices, production, exports and stocks are the elements 
over which control is sought in a commodity agreement. 
Since, however, prices are influenced by variations in stocks 
and in export quotas, and since production control is viewed 
chiefly as a means of making export quotas eff*ective, it will 
be useful to identify commodity agreements as either quota 
schemes or buff*er-stock operations. 

Any quota scheme restricts the volume of trade in the 
regulated commodity and tends to freeze it in existing channels 
and perpetuate high-cost production. It can obviously do 
little to relieve the excess of employment or investment or 
the chronic overproduction that usually begets such schemes, 
but it can at least cushion producer incomes until employment 
and investment opportunities elsewhere in the economy are 
able to absorb the underemployed resources. Since producers 
instigate quota schemes, they show a natural tendency to 
disregard consumer interests. High prices and low volume 
are generally preferred to large volume and low prices. 
Finally, quota schemes interfere extensively with private 
trading operations and, in fact, would operate most efl'ec- 
tively in a state trading regime. 

Clearly, quota schemes run strongly counter to America's 
interest in liberalizing commercial policy and in expanding 
international trade opportunities for private enterprise. We 
are nevertheless heavily committed to postwar participation 
in quota schemes for cotton, sugar and wheat, and to probable 
participation in similar schemes for rubber, tin, coff'ee and 
copper. Considering the range of possible alternatives, it 
would be the author's opinion that American participation in 
intergovernmental controls is desirable with respect to all 
these commodities, though for difl"erent reasons, and despite 

• 143 • 

Controlling World Trade 

the characteristics of quota schemes mentioned above. It is 
nevertheless highly important, from the viewpoint of our main 
commercial policy objectives, that (1) quota schemes be 
limited to the fewest possible commodities and for the shortest 
possible time; (2) positive measures providing for alternative 
employment and investment opportunities accompany any 
restrictive scheme; and (3) the scheme itself provide adequate 
representation for countries whose interests are mainly in 
imports and in the export of low-cost output. 

The first condition is rendered easier of fulfillment by the 
fact that the organization of an effective quota scheme 
embracing all important sources of supply is an extremely 
difficult operation. This is but negative protection, however. 
In addition, we need to set limitations on our participation in 
commodity agreements, and we need to exert our influence, 
through international organization, to establish corresponding 
limitations for all commodity agreements. No quota scheme 
should be consummated before the aggravating economic 
situation has been thoroughly explored and the complete 
range of alternative possibilities canvassed. No quota scheme 
should be negotiated for a period longer than three years, and 
its renewal should be subject to the same prior investigation. 

If the economic imbalance is caused by chronic overpro- 
duction, the quota scheme itself can contribute little toward its 
remedy. Neither developmental programs nor other meas- 
ures designed to create employment and investment oppor- 
tunities can be easily focused on the distressed area or industry. 
Permanent relief can only be provided through an over-all 
economic expansion, and this solution opens up the related 
question of a full-employment policy. 

A rapid and sustained rate of industrial expansion would 
solve most raw material problems. It is hardly possible, 
however, to make the universal adoption of full-employment 
policies a condition for the approval of a restrictive commodity 
agreement. Policies and institutions conducive to economic 
expansion need to be actively pursued, while at the same time 

• 144 • 

Summary of Findings and Recommendations 

restrictive schemes are limited to the smallest possible segment 
of the economy. The Bank and the Fund are such institu- 
tions, and to them should be added an International Com- 
mercial Policy Organization actively working for the reduction 
of trade barriers and trade discrimination. It might even be 
suggested that an international commodity organization 
require, as a condition of its approving a control scheme — 
and the United States might require as a condition of its 
participation — that the countries proposing commodity con- 
trols cooperate with these world organizations and subscribe 
to their purposes. 

A commodity agreement in which countries that are net 
importers of the commodity are represented is not the equiva- 
lent of one in which ultimate consumers are represented, but 
it is the most effective device available for assuring some 
consideration of consumer interests. When, as frequently 
happens, the success of a quota scheme depends upon the 
enforcement of import quotas by consuming countries, or 
upon the adherence of important countries having potential 
sources of supply outside the agreement, the representation of 
net importers is readily achieved. As a matter of principle, 
however, the United States should demand adequate repre- 
sentation of net importing countries as a condition of its 
participation in quota schemes, and a commodity organization 
should set the same condition on its approval. 

Buffer Stocks 

Raw material prices are notoriously unstable. If changes 
in price could be made to reflect only those changes in supply 
or demand conditions that give some promise of enduring, the 
gain in relative stability would substantially benefit both 
producers and users of raw materials. Much of the 
variation in raw material prices is the result of changes in 
market forces that could be offset by relatively small additions 
to or releases from a buffer stock. Harvest variations in 

• 145 • 

Controlling World Trade 

supply and cyclical fluctuations in demand would require 
much larger purchases and sales, but even changes like these 
are capable of compensation. The cost of storage and the 
technical obstacles to storage rule out buffer-stock operations 
for a number of raw materials even if it be assumed that these 
operations could be sustained on a purely compensatory basis. 
Basically, however, the difficulties in the way of a storage plan 
lie (1) in properly estimating the level or trend of prices from 
which deviations are subject to compensation and (2) in 
keeping purchase and sales policies consistent with that level 
or trend in the face of pressure from interested groups. Most 
storage plans to date have foundered on one or both of these 
obstacles. Operations on a level higher than the market 
justifies, over the long run, will result in increased cost of 
storage, both because they serve to increase the quantities 
stored, and because they involve purchase at prices difficult 
to recover through subsequent sales. 

Buffer-stock operations are greatly simplified if they are 
conducted in conjunction with a quota scheme. By subject- 
ing supplies coming on the market to some measure of control, 
it is possible not only more easily to rectify mistakes in esti- 
mating a price level that can be sustained but to lessen 
political pressure on storage policy. If a quota scheme is 
inevitable, a well-managed buffer stock can contribute 
substantially to smoothing its operation, first by minimizing 
short-run price fluctuations and second by reducing the 
necessity for frequent quota changes. 

In the absence of export or production control, however, 
international buffer-stock operations are not recommended, 
whether as a control scheme for particular commodities or 
as a general counter-cyclical "commodity corporation" 
dealing with a group of raw materials. Continuation of our 
agricultural price-support program, together with "ever- 
normal granary" operations, will inevitably result in the 
accumulation of huge stores of farm products in the United 
States. Our storage contribution to the world's surplus raw 

• 146 • 

Summary oj Findings and Recommendations 

material problems had best end there, without our attempting 
to finance the withholding of commodities overproduced by 
other countries. 

The disposal of war-accumulated surplus stocks, however, 
will necessarily involve governments to some extent in buffer- 
stock operations. These surpluses obviously cannot be sold 
off at a fixed rate without regard to market conditions. On 
the other hand, too assiduous attention to price stabilization 
may well defeat the primary objective: disposal. The British 
Empire wool scheme sets 12 or 13 years as the period practi- 
cable for the disposal of surplus wool stocks. Both the time 
limit and the intergovernmental cooperation embodied in 
this plan are worth our consideration in formulating policies 
governing the disposal of surplus raw material stocks. 

International Commodity Organization 

There are a number of reasons why the United States 
should participate in some type of international organization 
to supervise control of particular commodities. Such an 
agency should investigate thoroughly the need for control, 
oversee the administration of such regulation as may be 
attempted, and assure the observance of those principles of 
organization that receive broad international approval. 
Although United States participation is necessary to the 
effective operation of most of the prospective raw material 
controls, and our influence might therefore be exerted through 
them, there are certain items like tea, tin, and possibly cocoa, 
from control of which we are excluded. If governmental 
commodity agreements are to be a recognized instrumentality 
of commercial policy, all agreements should be brought within 
the same international framework and subjected to similar 
tests and restraints. 

If, furthermore, restrictive commodity agreements are to 
be made an exception to the broader objectives of trade- 
barrier reduction and economic expansion, a commodity 

• 147 • 

Controlling World Trade 

organization should be subordinated to a general inter- 
national agency primarily dedicated to the removal of restric- 
tions on the flow of goods in international trade. Commodity 
planners are prone to conceive the public interest in terms of 
the well-being of their own producers, and an international 
commodity organization, unchecked by broader policy 
considerations, might view as its task the promotion rather 
than the restraint of commodity agreements. Manifestly, 
the creation of international machinery does not itself assure 
the adoption of particular policies, nor can we, in any future 
international commercial policy organization, count on 
unalloyed influence in the direction of trade-barrier reduction. 
Nevertheless, the recommendations of such an organization 
are more likely to be directed toward expansion of inter- 
national trade than are those of an agency concerned exclu- 
sively with commodity problems. International commodity 
policy is properly a branch of over-all commercial policy, and 
this subsidiary relationship should be fully recognized in 
whatever international machinery may be devised. 



INTERGOVERNMENTAL agreements relating to a particular 
commodity may take many forms and be directed toward 
a variety of objectives. One of the most common forms is the 
bulk-purchase arrangement whereby one government assures 
its requirements of a given commodity by a purchase agree- 
ment negotiated with another government. In fact, most 
of the goods offered for sale in world trade during the war 
moved under bulk-purchase arrangements. Barter deals, 
like the exchange of United States cotton for British rubber 
immediately before the war, represent another form of inter- 
governmental commodity agreement. 

Occasionally a government allocates import quotas to its 
principal suppliers of a particular commodity. In 1 937, for 
example, the British government consummated a beef agree- 
ment allotting import quotas to Australia, New Zealand, Eire, 
Argentina, Brazil and Uruguay. Under the terms of an inter- 
American coffee agreement negotiated in 1940, the United 
States allots import quotas to the coffee-exporting countries 
of Latin America. Security considerations revolving around 
hemisphere solidarity provided the primary impetus for the 
coffee agreement. 

Other types of intergovernmental agreement embrace all 
the principal exporters of a commodity and, with or without 
consumer representation, attempt to control the world trade 
in it and fix world market prices. The tin and rubber agree- 
ments were of this sort, and so are the proposed wheat and the 
existing sugar agreements to which the United States is party. 

It is with this particular type of arrangement, the so-called 
"multilateral commodity agreement" aimed at encompassing 
world trade in a particular commodity, that this chapter is 
primarily concerned. Although arrangements covering avia- 

• 149 • 

Controlling World Trade 

tion and perhaps other industries of the public utiUty type 
show a certain similarity to commodity agreements, they 
present special problems not considered here. Even within 
this limited compass, however, there are still several kinds of 
multilateral commodity agreements, of which discussion will 
be postponed to later chapters. 


The particular type of intergovernmental commodity agree- 
ment with which we are concerned is an instrument that came 
into use during the interwar period, partly as a result of 
economic dislocation induced by the First World War. The in- 
crease in agricultural production outside war-blockaded Europe 
left the world with persistent surpluses of certain crops for 
which there was no adequate market. The international 
sugar and early wheat agreements in particular were to some 
extent the by-product of such war-induced overexpansion. 

However, as Rowe has pointed out, there were two other 
and more basic causes of the emergence of unmanageable raw 
material surpluses in the interwar period.^ The first was the 
rapid and continuous flow of technological improvements in 
commodity production throughout all parts of the world. 
New varieties of seed, new uses and kinds of machinery and 
the opening of new and favorable areas of cultivation made 
for a continuous expansion of agricultural output unchecked 
either by the slow rate of increase of consumption or by falling 
prices. As illustration we need only cite the introduction of 
new and superior varieties of sugar cane in the East Indies, the 
opening up of low-cost cotton plantations in Brazil and of 
coffee plantations in Central America, and the expansion of 
native rubber cultivation^ particularly in the Netherlands 

1 J. W. F. Rowe, Markets and Men; a Study of Artificial Control Schemes in Some 
Primary Industries, The Macmillan Company, New York, 1936. C/. M. T. Cope- 
land, A Raw Commodity Revolution (Bureau of Business Research of the Graduate 
School of Business Administration), Harvard University, Boston, 1938. 

• 150 • 

Origins and Aims of Commodity Agreements 

East Indies. These and parallel developments were begin- 
ning to create difficult surplus problems even before the 
depression of the 1930's. 

A second factor augmenting world raw material surpluses 
was the rise of economic and, in particular, of agricultural 
nationalism in the inter war years. European and British 
dependence on imported foodstuffs was lessened by govern- 
mental encouragement, for security reasons, of local agricul- 
tural production. Grains, sugar, fats and oils were all 
protected or subsidized. Development of synthetic products — 
fibers, rubber, drugs and pharmaceuticals, and fertil- 
izers — strengthened the economic independence of countries 
preparing for war but intensified the problem of surpluses 
faced by raw-material-producing countries. 

In the 1930's a disastrous shrinkage in demand further 
accentuated the gravity of their situation. Although prior to 
1921 a number of international commodity controls had 
already been introduced, the decade of the 1930's saw a 
considerable expansion in the scope of these arrangements. 

Management of raw material surpluses is not, of course, the 
only reason for intergovernmental commodity agreements. 
The notorious instability of raw material prices creates at 
least one problem for which international buffer stocks seem 
to offer a solution. Ends that may also be served by inter- 
governmental commodity agreements include the conservation 
of irreplaceable resources, elimination of wasteful cropping 
and other methods of exploitation, application of raw 
material sanctions against potential aggressor nations, and 
securing of equitable access to scarce strategic materials. 
But, before examining these objectives further, it must be 
emphasized that the preeminent reason for the introduction 
of international commodity controls is to be found in the 
persistence of acute raw material surpluses, and that the 
postwar period is not likely to witness their disappearance. 

The war induced an expansion of agricultural and mineral 
output that will challenge disposal. Technological innova- 

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Controlling World Trade 

tions in raw material production have by no means run their 
course. How extensive the surplus problem is likely to be will 
depend, of course, not only on the output of particular com- 
modities but on the prevailing level of economic activity and 
the volume of international trade. The postwar outlook for 
raw materials is examined more particularly in the next 


Commodity agreements have frequently become inter- 
governmental only after prior attempts at other types of 
control had failed. The most important antecedents of 
intergovermental agreements have been (1) private cartel 
arrangements and (2) national valorization or price-support- 
ing schemes. 

Existing or prior agreements covering rubber, tin, tea and 
a number of other products first saw the light of day as purely 
private cartel arrangements. Lacking the support of govern- 
mental authority, however, they were too weak to accomplish 
the restriction of exports and production for which they had 
been created.^ Ordinary business chicanery and the growing 
competition of producers outside the cartels kept their effec- 
tiveness in jeopardy, and it was mainly to prevent a breakdown 
of private controls that governments intervened. It is worth 
noting that government intervention was not undertaken at 
the insistence of exploited consumer interests but on the 
solicitation of important producing groups. 

Many an actual or projected commodity agreement has 
developed out of a national scheme to support or lift the prices 
of given commodities. If an international cotton agreement 

1 In general, the fewer the producers the more likely it is that they will be 
able to come to a mutually satisfactory arrangement without the intervention of 
government. This is particularly true if the market position of these producers is 
strengthened by patent controls, the pooling of which may provide the essential 
basis of the agreement. Industries with a large number of producers may be 
forced to enlist the support of governments to accomplish what others with a high 
degree of concentration can accomplish privately. 

• 152 • 

Origins and Aims of Commodity Agreements 

comes into being, it will be largely through the efforts of the 
United States to combine price support for domestically 
consumed cotton with the assurance of a place for American 
cotton in the world market. The present and previous coffee 
agreements followed Brazil's attempts over several decades to 
manage single-handed its recurrent coffee surplus. The 
existing sugar agreement and its predecessor, the Chadbourne 
plan, grew out of Cuba's unsuccessful efforts to handle her 
sugar surplus by unilateral action. In each case, the country 
principally interested in control as a means toward price 
support has seen its share in the world market decline in favor 
of uncontrolled areas. 

An effective multilateral commodity agreement is, for- 
tunately or unfortunately, extremely difficult to consummate. 
The truth of this statement will, in all probability, be under- 
lined by the international cotton agreement now in process of 
negotiation. It is much easier, though less effective, to 
undertake national action, and, though again less effective, it 
is in many cases much easier to organize a private cartel than 
an intergovernmental agreement. To get low-cost producers 
into a restrictive agreement of any kind, national or inter- 
national, public or private, is always difficult. The reluctance 
of Dutch interests to enter the sugar, rubber and tin agree- 
ments is a clear-cut example. If the commodity surplus is 
acute in only one country, it may require extraordinary 
measures, such as a threat of heavy export subsidies, to force 
other producing countries into an agreement. 


For purposes of discussion, the objectives of multilateral 
commodity agreements may be classified as the promotion of 
(1) health and morals, (2) security objectives, (3) conserva- 
tion, (4) price stabilization and (5) the management of 
surpluses. The first three may be disposed of in rather sum- 
mary fashion, since it is with price stabilization and the 

• 153 • 

Controlling World Trade 

management of raw material surpluses that this report is 
primarily concerned. 

Health and Morals 

International regulation of the trade in opium and other 
drugs and narcotics is a matter of long standing and small 
mystery. Since these are commodities entering into inter- 
national trade and since the regulation attempted is by 
intergovernmental agreement, the subject properly belongs in 
a discussion of commodity agreements. It is included here 
merely for completeness of classification. 

Security Objectives 

The pursuit of security objectives is a more novel aspect of 
international commodity agreements, and potentially more 
important. In the postwar period, intergovernmental agree- 
ment may be desirable to prevent a scramble for scarce 
strategic materials desired for national stockpiling or other 
security purposes. The imposition, by international agree- 
ment, of mineral, oil or other commodity sanctions upon 
potential aggressors constitutes another type of security objec- 
tive, one that requires extensive regulation of the commodities 
in world trade. 

The oil interests of the United States, Great Britain, France 
and the USSR in the Middle East are a source of potential 
friction that may be alleviated by intergovernmental action. 
The petroleum agreement between the United States and 
Great Britain now awaiting ratification is an open-end affair, 
and Russia, France and other countries having interests in 
oil should be invited to participate as soon as may be. The 
proposed oil agreement, of course, has other objectives than 
security interests. These will be discussed later. 

Most of the great powers stockpiled strategic materials 
before the war, and it is probable that they will do so again. 
A number of strategic materials, like copper, will be available 

• 154 • 

Origins and Aims of Commodity Agreements 

in quantities more than ample for all stockpile requirements. 
Others will be scarce but, pending any knowledge of the size 
of projected stockpiles, it is impossible to say whether require- 
ments for strategic materials will or will not produce a com- 
petitive scramble for these materials. If they do, international 
agreement on timing, rate and areas of purchase may be 

Experience with methods and techniques of economic 
warfare should by now have indicated to what extent the 
military capabilities of a particular country can be frustrated 
by denying it access to external resources. The exaggerated 
results expected from Allied strategy at the outset of the 
Second World War were almost entirely nullified by the 
degree and duration of German self-sufficiency. In this age 
of synthetics and totalitarian government, certain of the great 
powers could make war indefinitely without access to resources 
outside their borders. The techniques of economic warfare 
could, nevertheless, be applied to more limited areas with 
considerable success. If applied in peacetime, however, as 
economic sanctions against a potential aggressor, these 
methods would require, if not complete control of transport 
into the off*ending country, then agreement among all the 
principal users and producers of the commodity to which 
access is to be denied. 

After analyzing the difficulties involved in the application 
of mineral sanctions, an authority on this subject concludes: 

Any control plan must therefore contemplate world-wide co- 
operation and gap-proof control at all times of imports and exports 
of all metal products, primary and secondary, and scrap, and to and 
from all countries. It will require something like a world-wide 
system of metal allocations to thousands of metal dealers, fabri- 
cators and manufacturers, and complete control over all their ex- 
port and import transactions.^ 

1 P. D. Merica, "Mineral Control — Wise or Unwise?," Mining and Metallurgy 
(April, 1944). This issue is devoted to a symposium on "Control of Mineral 
Supplies to Preserve Peace." 

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Controlling World Trade 

Although this view may be somewhat extreme, and although 
sanctions could be applied much more easily to certain com- 
modities than to others, the fact still remains that the adminis- 
tration of economic sanctions in peacetime would demand a 
high degree of international cooperation. Such cooperation, 
however, is contemplated by the United Nations organization, 
which assigns to the Security Council responsibility for the 
formulation and administration of economic sanctions. 
Application of a commodity sanction would involve a particu- 
lar kind of multilateral commodity agreement. 

Thus far we have been discussing security objectives as 
instruments for the prevention of war. Security, however, has 
another face: the preparation, in a particular country, of the 
instruments of war. The stockpiling of strategic materials 
is one step in that direction; others include the safeguarding 
of potential sources of strategic raw materials and the main- 
taining of synthetic production capable of replacing imported 
raw materials. The latter objectives, as they affect conserva- 
tion, anticipate somewhat the discussion in the next section. 

During the war the United States depleted its reserves of 
petroleum and of certain minerals at an alarming rate. 
According to the Army and Navy Munitions Board, 

. . . the quantity of minerals produced in 1943 was 57 per cent 
greater than the output in 1918, and 23 per cent above that in the 
boom year 1929. Unless new reserves are discovered, therefore, our 
country in the future will be even more dependent upon foreign 
sources than it has been in the past and, to a large extent, stockpile 
goals must therefore be raised. The continuance of the existing 
domestic program of exploration of natural resources is clearly im- 
perative. In addition, the rapid depletion of our domestic reserves 
emphasizes the extreme importance of developing a program for ob- 
taining information on the location and extent of world resources and 
for acquiring stockpiles of raw materials in which this country is 
largely deficient.^ 

1 79th Congress, 1st Session, Document No. 5, Jan. 6, 1945. One does not have 
to take this statement, or similar evaluations emanating from the U.S. Depart- 
ment of the Interior, at face value to recognize we are facing a scarcity situation 

• 156 • 

Origins and Aims of Commodity Agreements 

Apart from such measures as these, elementary pre- 
caution would appear to dictate the preservation, within 
such areas as we are capable of defending, of petroleum and 
other strategic resources in the ground. This would imply 
that production in, let us say, North America and the Carib- 
bean area, of petroleum, bauxite, lead, zinc, copper, mercury 
and a few other strategic materials should be curtailed in 
favor of imports from outside this strategic area. Such a 
policy would be extremely unpopular with the producers of 
these materials, and any extended program of conserving 
strategic materials in the ground might have to take into 
account the primary and subsidiary vested interests of capital 
and labor in the areas affected. 

The preservation of resources beyond American territory 
would require international agreements embracing at least 
those countries within the conservation area and, perhaps, 
producing countries outside this area. As regards oil, for 
example, the United States might achieve two important 
security objectives by international agreement: the avoidance 
of international conflict over control of the limited oil resources 
of the world, and the lessening, insofar as possible, of the drain 
on North American and Caribbean oil supplies. If and when 
the proposed oil agreement is broadened to cover the prin- 
cipal oil-producing and consuming countries of the world, a 
forum will have been created for the discussion, if not the 
reconciliation, of the interests of the participants. The agree- 
ment, besides relieving the production and marketing 
restrictions under which American companies operating 

in a number of strategic materials. On the other hand the United States military 
authorities have not begun to realize the possibilities of substitution in the 
economizing of scarce materials. Germany managed to fight quite a sizeable war 
with a fraction of our industrial material requirements. Contrast, for example, 
the 200,000 tons of copper annually available to Germany with the 2 million tons 
that left the American military program chronically short. Technological de- 
velopment, moreover, continually encourages the exploitation of low-grade re- 
sources and diminishes such loss in efficiency as may be involved in the process of 

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Controlling World Trade 

in the Middle East now function, might go further and 
encourage a rapid development of the vast Middle Eastern 
fields, thereby conserving to some extent the dwindling 
Western Hemisphere reserves. The chief opposition to such 
a development may be expected to come from domestic oil 
interests in the United States. Similarly, international agree- 
ment with respect to other strategic materials might well 
facilitate the exploitation and use of resources outside the 
American strategic area. 

The disposition of war-developed synthetic rubber and 
synthetic nitrate plants raises security questions of particular 
importance. Either or both may be handled by unilateral 
action, but both involve international considerations and may 
properly call for intergovernmental agreement. 

The United States has a synthetic rubber capacity in excess 
of 1 million tons — almost double the prewar domestic civilian 
consumption and slightly below total world consumption. 
Although little definite is known about the actual or prospec- 
tive cost of synthetic production, it is doubtful whether any- 
thing other than special-purpose rubber could compete with 
crude in a free market in the foreseeable future. According 
to Knorr, a price of 8 cents a pound is adequate to insure a 
fair profit to efficient estate operations and bring forward 
ample quantities of native rubber.^ The experience of the 
1930's indicates that, even at prices much lower than this, 
production will persist in large volume. 

For the next two or three years the total available crude and 
synthetic rubber production will be required to meet current 
needs and to replace depleted stocks. The world at that point 
will be confronted with nearly 3 million tons of rubber 
capacity (roughly 1,300,000 synthetic and 1,600,000 crude) 
against prospective markets, on fairly optimistic assumptions, 
for not more than 1.5 million tons. 

1 K. E. Knorr, Rubber After the War (War-Peace Pamphlets, No. 4) (Food 
Research Institute), Stanford University Press, Stanford University, Calif., 
1944, p. 35. 

• 158 • 

Origins and Aims of Commodity Agreements 

Security interests clearly demand the retention of some part 
of our synthetic capacity. On the other hand, the mainte- 
nance in production of the whole of our existing plant, or even 
of a volume of synthetic production sufficient for civilian 
requirements, is unnecessary to our security and inadvisable 
for other reasons. In view of the rapidity of technical 
improvements in this industry, the maintenance of idle, 
stand-by capacity on any considerable scale is probably not 

It may be ventured that an annual synthetic production of 
not less than 200,000 tons or not more than 400,000 tons 
would amply protect the security interests of the United 
States. The carrying of large manufacturers' stocks should be 
encouraged, and, if further protection seems necessary, a 
revolving military stockpile of rubber might be maintained. 
These stores, plus the yield of secondary rubber, which, in the 
United States, is large and expansible, should be ample to 
tide over any emergency expansion of domestic synthetic 
production. It would probably be more economical to re- 
build a part of our capacity every twenty years than to try 
to maintain continuous high-cost production. 

Other considerations, moreover, favor a continued reliance 
on the import of sizeable quantities of crude rubber. Exports 
of rubber and tin from the Netherlands East Indies and the 
Malay States are a source of dollars with which imports from 
the United States are paid. We also have interests in 
Southeast Asia that can be furthered by continued economic 
intercourse. Finally, elimination of the American market 
might conceivably lead to the development of bilateral trade 
between this area and Japan, a development we might not 
regard as being in our interest. ^ 

Our security objectives in rubber might, of course, be 
attained by unilateral action. The United States could 

1 Cf. J. B. Condliffe, "Economic Power as an Instrument of National Policy," 
American Economi Review, Supplement, Vol. XXXIV, No. 1, Part 2 (March, 

• 159 • 

Controlling World Trade 

either subsidize or protect the desired volume of synthetic 
production and let the rest of the rubber world take care of 
itself. There are, however, strong reasons for concerting our 
action on rubber with that of other countries, at least to the 
extent of exchanging information on projected policy and 
undertaking a combined study of the whole problem. The 
United States has already joined with Great Britain and the 
Netherlands in an International Rubber Advisory Committee 
and should find this participation useful in working out a 
national policy on rubber. Whether or not a chronic 
surplus, requiring more positive action, will eventually con- 
front the rubber industry depends mainly on what we do with 
our synthetic capacity. 

The disposition of our synthetic nitrogen capacity, which 
presents a somewhat similar problem, is discussed in a later 


Conservation of natural resources appears as a direct or 
indirect objective in nearly all international raw material 
schemes, public or private. In many the conservation 
argument is clearly window dressing utilized to justify restric- 
tion of output or exports for quite other purposes. Conserva- 
tion iV, however, involved in all agricultural and extractive 
industries, and the issue it raises is twofold: whether the waste, 
in any proper economic sense, caused by an uncontrolled use 
of resources is sufficient to justify governmental or private 
cooperative intervention; and whether, if such intervention 
is undertaken on the grounds of conservation, the advantages 
are not outweighed by other disadvantages. 

Conservation may be practiced indirectly by assuring to 
producers prices and incomes sufficiently high and sufficiently 
stable to permit an economic use of the soil or of mineral 
deposits; it may also be enforced directly by regulating 
methods of exploitation and quantities extracted. 

Prolonged periods of low producer incomes tend to over- 

• 160 • 

Origins and Aims of Commodity Agreements 

cropping and exhaustion of the soil and to wasteful exploita- 
tion of mining properties. As T. W. Schultz puts it, an 
agricultural investment is usually not liquidated, with conse- 
quent transfer of resources to other uses, "until the farmer has 
exhausted the soil of his farm and himself after years of futile 
effort to stave off bankruptcy."^ 

Concerning mining properties, the National Resources 
Planning Board reported in the midst of the depression, 
"Existing mines were laid out with a certain price level in 
mind and with a certain anticipated life. When prices 
collapse, the initial plan of operation must all too often be 
discarded. Today mine operators are forced to neglect the 
most elementary work of maintenance."^ 

Conservation effected through maintaining price levels and 
incomes is defended on the ground that it avoids any detailed 
overseeing of production units and processes. The incomes 
thus maintained, however, may obviously be used for other 
than conservation purposes. Moreover, it is frequently 
impossible for a country to sustain producers' incomes and con- 
tinue to export without subsidy the output of these producers in 
a competitive world market. Thus price or income mainte- 
nance in the domestic market, whether intended for conserva- 
tion or other purposes, may lead in the direction of international 
commodity arrangements. 

"The raw material problem," as Watkins observes, "is 
preeminently, though not exclusively, an international 
problem. Climatic zones and the geographic pattern of the 
geologic occurrences of minerals conform neither to the 
political subdivision of the earth's surface nor to any demo- 
graphic distribution pattern, historical, actual or prospective."^ 

1 Theodore W. Schultz, Agriculture in an Unstable Economy (Committee for 
Economic Development Research Study), McGraw-Hill Book Company, Inc., 
New York, 1945, p. 30. 

2 Report of Planning Committee for Mineral Policy, 1934, p. 409. 

^ M. W. Watkins, "Scarce Raw Materials; an Analysis and a Proposal,'* 
American Economic Review, Vol. XXXIV, No. 2 (June, 1944). 

• 161 • 

Controlling World Trade 

To approach the problem of conservation via price and 
income maintenance schemes for industries in which wasteful 
methods of exploitation are associated with inadequate or 
unstable income prospects would lead us very far indeed in the 
direction of either private cartel or of intergovernmental 
restrictive agreements. The kinds of trade restrictions 
involved in the pursuit of these objectives by private cartels 
have been discussed in Part I, and the restrictions attending 
intergovernmental agreements will be discussed in later 
chapters in Part II. 

Except in a group of industries discussed below, conserva- 
tion has never been the primary objective of commodity 
agreements. Such improvements as have been achieved in 
resource utilization have been incidental to other objectives. 
Until there is convincing evidence to show extravagant waste 
of irreplaceable natural resources, national policy toward 
international commodity controls should probably continue 
to be framed primarily with objectives other than conserva- 
tion in mind. However, such conservation as may inciden- 
tally be achieved must be credited to commodity controls. 

A series of international fishing agreements was justifiably 
undertaken for conservation purposes. To quote the author- 
ity on this subject, "The basic principle of exploitation of all 
m^arine resources is that marine resources must be regarded as 
crops to which an appropriate harvesting policy must be 
applied. This is especially true of marine species in which the 
number of adults and the intensity of fishing have great 
influence on future abundance."^ 

Since the greater part of the industry consists of high-seas 
fisheries to which all maritime nations have access, application 
of the principle of sound harvesting depends upon inter- 
national agreement. In 1911 an agreement regarding fur 
seals was consummated between the United States, Great 

1 Jozo Tomasevich, International Agreements on Conservation of Marine Resources 
(Commodity Policy Studies, No. 1) (Food Research Institute), Stanford Uni- 
versity Press, Stanford University, Calif., 1943, p. 50. 

• 162 • 

Origins and Aims of Commodity Agreements 

Britain, Russia and Japan. It expired in 1941, when Japan 
withdrew, but will clearly have to be renewed. An agreement 
between the United States and Canada, signed in 1923 and 
still in effect, regulates the catch of Pacific halibut. The 
American-Canadian convention of 1930 applying to Fraser 
River Sockeye salmon provided for a long period of study 
and has had little effect. The relatively few countries 
involved has made international agreement easier in these 
areas, but international regulation of whaling, in which the 
interests of many more countries are at stake, has proved much 
more difficult to achieve. Although 26 nations managed to 
agree to the whaling convention of 1931, Russia, Japan, Chile 
and Argentina abstained, and, with the exception of Argentina, 
the same countries refused to adhere to the 1938 agreement.^ 

Price Stabilization 

International commodity agreements have as their primary 
objectives the control of price fluctuations and the manage- 
ment of surpluses. With respect to foodstuffs, the record is 
one of sustained consumption and production (subject to crop 
variations) throughout the cycle but of great variation in 
prices and, consequently, in producer incomes. With respect 
to industrial raw materials, both consumption and prices 
show wide cyclical variations. The production of such 
cultivated industrial raw materials as cotton and rubber is 

1 Karl Brandt, Whale Oil; an Economic Analysis (Fats and Oils Studies, No. 7) 
(Food Research Institute), Stanford University Press, Stanford University, 
Calif., 1940. The author concludes the chapter, "International Cooperation in 
Whaling," with the following comment: "Thus far, the experiment toward 
international regulation of whaling has yielded some results that represent limited- 
progress in the right direction. They have reduced and perhaps practically 
stopped the pursuit of whales in their mating and nursing grounds, and the 
slaughter of lean whales has been reduced. But the ultimate purpose of inter- 
national regulation, namely the prevention of over-fishing, has not been attained." 
An international whaling conference was held in London, January, 1944, 
which recommended to the participating countries certain amendments to the 
1938 agreement. With Germany and Japan under control a more effective 
regulation of whaling may now become possible. 

• 163 • 

Controlling World Trade 

fairly well maintained; stocks accumulate as consumption 
falls. Mineral production, which is usually highly con- 
centrated, tends to vary more closely with consumption. For 
cyclical and other reasons, all raw materials exhibit an 
extraordinary degree of price variation/ 
To quote a recent report, 

During the last twenty years, the price of wheat and of jute has 
been halved three times within about twelve months, the price of 
cotton three times in periods of under eighteen months. The price of 
copper and of lead was halved four times within periods of two years 
and doubled three times even more rapidly. The price of zinc was 
halved twice in eighteen months, of tin twice in twenty-four months; 
zinc and lead doubled in price three times in two years or less; 
copper three times in eighteen months. On one occasion the price of 
coffee was halved in eight months, on another the price of sugar 
trebled in four months. Between 1920 and 1933, the price of crude 
rubber fluctuated between four cents a pound and twenty-five times 
that amount, and was on several occasions doubled or halved in the 
space of a few months.^ 

Of these fluctuations, some of the more extreme were, it is 
true, precipitated by the formation or collapse of ill-advised 
national and international price-control schemes; but the 
causal direction moves from price variation to attempted 
price control, and not the other way around. 

Politically, the easiest way to stem a continuing decline in 
the price of a storable commodity is to undertake a govern- 
ment purchase and storage program. The economic history of 
the last two decades provides not only abundant examples of 

1 Cf. Watkins, op. cif.y "The speculative feature appears to inhere in the 
combined influence, in every raw material industry, of two or more of the four 
conditions enumerated below. These are (1) imputed demand, (2) weather 
variability, (3) hidden resources and (4) exhaustibility of sources of supply. 
The first factor listed is the sole one common to all raw material industries, but 
it alone would probably be adequate to account for their highly speculative 
character. In any case, actually, it is always linked in these industries with one or 
more of the other factors mentioned." 

2 "The Transition from War to Peace Economy," Report of the Delegation on 
Economic Depressions, Part I, League of Nations, 1943, pp. 23, 24. 

• 164 • 

Origins and Aims of Commodity Agreements 

the failure of such governmental attempts but also the reasons 
why they failed: in part because no distinction was made be- 
tween temporary price declines, seasonal or cyclical, and 
price declines due to chronic overproduction; in part — and 
this is particularly relevant to buffer-stock policy in the post- 
war period — because the political pressure of producer in- 
terests prevented management from using all the available 
economic intelligence. 

These observations could be illustrated from the history of 
almost any raw-material-producing country. In the United 
States the storage experience of the Federal Farm Board is a 
case in point. The advent of war saved the subsequent storage 
program of the Commodity Credit Corporation in the nick of 
time. By 1940 the Middle West was dotted with steel bins 
erected by the CCG to store grain; farmers had increased their 
storage space, and old schoolhouses, churches and other 
abandoned buildings were bulging with grain. The war 
changed these surplus stocks into a valuable asset, but, had 
there been no war, the storage program of the CCG would 
have been disastrous. 

Nevertheless, despite all previous debacles, the postwar 
period will again witness a reversion to the use of buffer 
stocks as a remedial device to mitigate the instability of raw 
material prices. 

Buffer stocks may be used to level off price variations in a 
single commodity; they may also be used in a counter- 
cyclical general raw material buying and selling program. 
When limited to a single commodity, either on a national or 
international scale, buffer stocks may be accumulated and sold 
to even out harvest or other short-run price variations: this is 
presumably the purpose of an ever-normal granary. They 
may also be used to relieve cyclical price variations, or, as in 
the British Empire wool disposal scheme, to liquidate gradually 
an accumulated surplus. Any of these operations may be con- 
ducted independently or as a part of quota programs. Buffer 
stocks, in their role of price stabilizers and in their relation to 

• 165 • 

Controlling World Trade 

quota schemes, are examined in Chap. III. At this point we 
are concerned with general counter-cycUcal raw material 
buying and selling programs. 

The possible use of buffer stocks on a national scale has al- 
ready arisen in discussions of a strategic stockpile for the 
United States.^ One subject for debate is v/hether this stock- 
pile, if created, should be exclusively military, with quantities 
determined by prospective emergency needs and withdrawals 
limited to military exigencies, or whether it should be essen- 
tially a buffer stock of materials useful to the armed services. 
The cushioning effect of a frozen military stockpile would be 
limited to the retention of war-induced surpluses, which would 
otherwise be thrown on the market, and to the postwar ac- 
quisition of commodities in excess production. In the case of 
scarce strategic materials, stockpile acquisitions, unless care- 
fully timed, might accentuate rather than mitigate price 

Since among strategic materials there are a great many 
international commodities subject to marked price variation, a 
military stockpile used for buffer-stock operations could con- 
ceivably achieve the effect of a counter-cyclical purchase pro- 
gram, at the same time that it serves its military purpose. 

1 The use of the stockpile created by the British "Essential Commodities Re- 
serve Act" for the purpose of stabilizing raw material prices within the British 
Empire was advocated by Keynes before the war. Cf. J. M. Keynes, "The Policy 
of Government Storage of Foodstuffs and Raw Materials," Economic Journal, 
Vol. XL VIII, No. 191 (September, 1938), p. 449 

Keynes asserts that 

It is an outstanding fault of the competitive system that there is no sufficient 
incentive to the individual enterprise to store surplus stocks of materials, so as to 
maintain continuity of output and to average, as far as possible, periods of high 
and low demand. The competitive system abhors a vacuum, because stocks yield 
a negative return in terms of themselves. It is ready without remorse to tear the 
structure of output to pieces rather than admit of them, and in the effort to rid 
itself of them. Its smooth and efficient working presumxcs in practice, as strin- 
gently as the static analysis presumes in theory, a steady rate, or a steady growth 
of effective demand. If demand fluctuates, a divergence immediately ensues be- 
tween the general interest and the course of action in respect of stocks which is 
most advantageous for each competitive enterprise acting independently. 

• 166 • 

Origins and Aims of Commodity Agreements 

There are, however, numerous economic difficulties in the 
way. Among the more serious are to be reckoned the problem 
of recognizing business cycle turns and the difficulty of dis- 
tinguishing, with respect to a single commodity, a cyclical from 
a more permanent price variation. Enough, however, is 
knov/n of trends so that military buffer-stock operations could 
produce a genuine counter-cyclical effect if the management 
of the stockpile were permitted a sufficient measure of dis- 
cretion. It is entirely improbable that this would be the case. 

The real obstacles to general buflfer-stock operations are 
political. From the debate on national stockpile legislation 
it is already obvious that high-cost American producers will 
press for the subsidizing of their operations at the expense of 
the stockpile; that, instead of advocating purchases abroad 
to conserve American mineral resources seriously depleted by 
the war, they will insist on a "buy American" clause; that 
they will exert pressure in favor of continuous purchase but 
against sales, now or at any other time. The merit of a frozen 
military stockpile is that it sets certain limits on the amounts 
that may be purchased. In a country in which producer 
groups are as well organized as they are in the United States, 
a military stockpile created for buffer-stock purposes is not 
likely to serve as a counter-cyclical raw-materials-purchase 

An international buffer stock might have certain advantages 
over a national one, but it would also have its disadvantages. 
An "International Commodity Corporation" of the sort sug- 
gested by Hansen^ would not be limited by military con- 

1 Alvin Hansen, "World Institutions for Stability and Expansion," Foreign 
Affairs, Vol. 23, No. 2 (January, 1944). 

Equally important [as an international bank] from the standpoint of preparing 
a world-wide attack on deflation would be the work of an International Com- 
modity Corporation, designed to buy, store and sell international raw materials 
and to act as a buffer in the raw materials market. In the event that a deflation of 
raw materials prices seemed to impend, the International Commodity Corpora- 
tion should make large purchases of storable raw materials. It would permit the 
free play of market price forces within upper and lower ranges for each com- 
modity. Buying operations would be indicated as soon as the price pierced the 

• 167 • 

Controlling World Trade 

siderations; it would buy and sell international raw materials 
solely for price-stabilization purposes. Its international struc- 
ture might perhaps defeat the preferential and discriminatory 
practices inevitably associated with national buffer-stock 
operations and might even counteract local pressures, but the 
larger economic problems might in some respects be more 
difficult. An international corporation would be dealing in 
world-wide commodities, exhibiting different seasonal, cycli- 
cal and secular characteristics. Sources of information on 
which to base its analysis and judgment would in certain 
areas be scant, and in others nonexistent. 

Here, again, the fundamental obstacles would in all prob- 
ability be political. Governments would tend continually to 
press for a higher level of prices for their own exportable raw 
materials, and would interfere with any attempt by the 
management to liquidate accumulated stocks. It is doubtful 
whether, at this stage of international organization, govern- 
ments would endow an international authority with sufficient 
discretion in the determination of world commodity prices to 
permit the effective functioning of an international buffer- 
stock corporation. 

The financing of an international commodity organization 
presents some very perplexing problems. If, in a depression, 
the Corporation accumulated stocks of the principal raw ma- 
terials involved in world trade, the over-all purchase sums 
would very probably be large. What currencies would be 
utilized, and in what proportions? Would the size of a 
nation's financial contribution be determined by the value of 
its commodity stocks in the Corporation fund or would the 
criterion be ability to lend without reference to any benefit? 
If lending ability should be the criterion, the financial con- 
tribution of the United States would be large. Would author- 
ity in the Corporation be divided proportionately? If so, how 

lower limit, and selling operations as soon as it rose above the upper limit. The 
upper and lower limits should be adjusted from time to time according to funda- 
mental trends of normal demand and supply. 

• 168 • 

Origins and ^ims of Commodity Agreements 

would United States foreign relations be affected by a Cor- 
poration decision to liquidate its stocks of particular com- 

The political obstacles to the operation of an international 
buffer stock appear to be greater than those in the way of in- 
ternational economic organizations in many other fields. 
The producers of raw materials, particularly agricultural 
raw materials, are numerous and well organized. In con- 
sequence, national pressures brought to bear on the manage- 
ment of such a stock are likely to be so strong as to defeat its 
fundamental purpose. The use of buffer stocks to level off 
fluctuations in the price of a single commodity, with or without 
quota controls, will be discussed later. 

Surplus Stocks and Chronic Overproduction 

It has been pointed out earlier that the immediate ante- 
cedents of many international commodity agreements have 
been either national valorization schemes designed to raise the 
price of surplus commodities, or cartel agreements that have 
collapsed because too large a part of world production escaped 
cartel control. Both the cartel and the national valorization 
program usually proved incapable of achieving the primary 
objective of commodity agreements, the management of 
supplies in chronic surplus. 

The import or export quota has been the chief instrument for 
the execution of commodity agreements. Those affecting 
sugar, wheat, rubber, tin, coffee, beef and tea have all been 
quota schemes. Any cotton agreement likely of negotiation 
will provide for export quotas, and the strongest support for 
them will undoubtedly come from raw-material-exporting 
countries faced with other actual or prospective surpluses. 

It is obvious that in itself a quota scheme provides no cure 
for a chronic surplus situation. At best, by fixing temporarily 
the percentage of the world export market allotted to par- 
ticular countries, a quota scheme may encourage a shifting of 

• 169 • 

Controlling World Trade 

resources out of the area of overproduction, rather than 
continued resort to export subsidies, barter arrangements and 
other undesirable commercial practices. 

The prewar history of quota schemes, it must be confessed, 
is not such as to engender confidence in the ability or willing- 
ness of participants to eliminate high-cost production, to shift 
resources to other uses or to adjust output to demand at 
prices that consider consumer as well as producer interests. 
In fact the management of quota schemes has behaved in 
quite the opposite fashion. In their prewar operations, these 
schemes tended to preserve the production status quo and 
freeze it in existing geographical patterns of distribution. 

A quota arrangement, it has been said, favors 

. . . high-cost producers by preserving for them a share in the 
market which otherwise they would almost certainly have lost, and, 
as time passes, it lets matters get worse by impeding any shift of pro- 
duction to low-cost areas. When a Control Council operating a 
quota scheme is faced with a decline in demand it always reduces the 
quota releases, never the price. Its principle is that of all producers, 
viz-, to sell a little for a lot, not a lot for a little.^ 

Indeed, about all that can be said in favor of prewar inter- 
governmental quota schemes is that they may have prevented 
even worse alternatives for disposing of raw material sur- 
pluses. A scramble for international markets by export sub- 
sidy, bilateral clearing arrangements, barter deals and the 
like would probably have operated to reduce even more 
effectively the total volume of world trade. 

Before the war, however, intergovernmental commodity 
agreements had already begun to move away from an ex- 
clusive concern with short-run producer interests and toward a 
more general concern with broad public interest. Out of 
earlier failures, moreoever, grew an awareness of the con- 
ditions necessary to the effective functioning of international 
commodity controls. 

1 P. Lamartine Yates, Commodity Control, A Study oj Primary Products (Fabian 
Society), Jonathan Cape, Ltd., London, 1943, p. 231. 

• 170 . 

Origins and Aims of Commodity Agreements 

Past experience has shown, for example, that inclusion of all 
the principal export sources is necessary to an effective agree- 
ment; that export controls are not likely to succeed for long 
without national control of output; that for many, if not all, 
commodities price-stabilizing measures without export con- 
trols are likely to fail; and that acreage controls are, in general, 
ineffective/ Experience gained from previous commodity 
agreements will no doubt be valuable in framing future con- 
trol better calculated to serve producer interests, but unless 
they also serve a broader interest, commodity agreements will 
probably meet with active and effective opposition from coun- 
tries adversely affected by their operation. 

Commodity agreements are not likely to become an im- 
portant international control device unless, in the manage- 
ment of postwar raw material surpluses, means are found 
(1) to encourage production in and export from low-cost 
areas, (2) to shift unneeded resources into other channels and 
(3) to establish a price policy designed to serve long-run con- 
sumer interests. Whether or not commodity agreements and, 
in particular, quota schemes may be expected to fulfill these 
conditions will be discussed in a later chapter. 

Concluding Remarks 

Although other types of intergovernmental commodity 
agreements have been mentioned in passing, attention will be 
limited in the ensuing discussion to buffer-stock and quota 
schemes. Our primary concern, therefore, will be with the 
stabilization of raw material prices and the management of 
surplus stocks and surplus production; certain questions that 
have already been raised will be examined further. Is the 
representation of consumer interests practicable and, if so, can 
it seriously affect price policy? To what extent can buffer 
stocks be managed without controlling export quotas? Can 
buffer-stock operations stabilize short-run price fluctuations 

1 CJ. International Labour Office, Intergovernmental Commodity Control Agree- 
ments, Montreal, 1943, p. XVII. 

• 171 • 

Controlling World Trade 

and at the same time contribute to long-run adjustment of 
output? Are quota schemes compatible with a shift of pro- 
duction to low-cost sources and with an elimination of excess 
capacity? Answers to these and other questions must be 
sought as we examine existing and proposed commodity 




THE decade before the war saw a drastically reduced de- 
mand for most raw materials followed, for many agri- 
cultural products, by an inadequate recovery. War and 
transitional requirements have, for the time being, reversed 
this situation. Except for a few areas deprived of markets by 
shipping limitations, the raw-material-producing countries 
within the Allied orbit have enjoyed an unlimited demand for 
their products. Other than wool and cotton, prewar agri- 
cultural surpluses have disappeared or are disappearing. 
The terms of trade for raw materials as against industrial 
products have almost everywhere improved. European re- 
quirements for relief and rehabilitation, and the replenishing 
of inventories there and elsewhere, will assure good markets for 
most raw materials in the immediate future. 

After this relief and restocking period is over, however, what 
then? The answer obviously depends, in part, upon the sound- 
ness of economic conditions and of the commercial and other 
postwar policies pursued by governments. Undoubtedly, of 
most importance will be the state of production and employ- 
ment in the principal industrial countries of the world and par- 
ticularly in the United States. This country has come to be on 
balance an importer of raw materials, and the magnitude of 
our net imports rises rapidly with industrial employment. As- 
suming a national income of 130 to 140 billions, our excess of 
imports over exports of raw materials and unprocessed food- 
stuffs will be of the order of 750 million to a billion dollars. 

A second influence vitally affecting the raw material situa- 
tion will be the attitudes of the principal trading nations of the 
world toward trade barriers. In some respects this outlook 
is promising. There is evidence that the United States is be- 

. 173 • 

Controlling World Trade 

coming aware of the implications of her creditor position and 
is ready to take the lead in international efforts to reduce trade 
barriers. The threat of war which in the 1930's was responsible 
for much of the trend toward autarchism is now at a further 
remove. On the other hand, the extremely faulty distribution 
of monetary reserves, the unhappy balance-of-payments 
position of most of the countries of Western Europe and the 
unmistakable trend toward government import and export 
monopolies all operate to reinforce barriers to trade. 

Postwar commercial policy will, in all probability, reflect 
the influence of Great Britain and her empire. If Britain can 
find the means to finance her inevitable import balance for the 
next few years, fund her blocked balances and, in the mean- 
time, restore her export capacities, the resultant liberalizing of 
commercial policy would be felt far beyond the Empire. If 
the maintenance of employment in the United States is the 
key to one major phase of the postwar raw material situation, 
the commercial policy of Great Britain is the key to the other. 

A less important influence, but one particularly aff'ecting 
the supply situation for minerals, will be the policy of the 
United States and Great Britain regarding the disposal of sur- 
plus war stocks. If these are largely impounded in stockpiles, 
strategic or other, the early postwar demand for a number of 
minerals and for some agricultural raw materials will be much 

Over the longer run, the raw material outlook will depend 
upon the rate of industrialization in certain economically un- 
developed areas of the world and upon the speed with which 
industrial production can be restored in Europe and the Far 
East. Most of the Latin American countries, India and China 
have extensive industrialization plans, and their dollar hold- 
ings at the end of the war will permit a substantial beginning. 
From then on, however, foreign capital will be needed, and 
the availability of funds from newly created international 
lending institutions and from private and public sources in the 
United States will pretty much set the pace for development 

. 174 • 

Outlook for Particular Raw Materials 

in these areas. Industrialization, moreover, is a slow process. 
The rate of industrial expansion would have to be extraor- 
dinarily rapid to keep pace with other potential expansion, 
at least in agricultural raw materials/ 

Granted that the general conditions and policies outlined 
above will profoundly affect the postwar raw material out- 
look, there is reason to believe that even were the most 
optimistic expectations realized, we should still find a number 
of raw materials produced in substantial and chronic surplus. 
In discussing the prospects for particular materials it will be 
useful to group them as foodstuffs, agriculturally produced 
industrial materials, and minerals. The causes of anticipated 
surpluses in the three groups will be found to differ substan- 


In the United States and in the world, the terms of trade 
(the quantity of manufactured products that can be pur- 
chased from the sale of a given quantity of agricultural prod- 
ucts) have, from 1920 to the recent war, run persistently 
against agricultural products. There is every indication that 
in the next year or two these long-run forces will again begin 
to operate against the prices of agricultural products.^ Under- 
lying the trend in foodstuffs are three principal causes: the 
decline in the rate of increase of industrial employment, the 
well-attested fact that as incomes increase a smaller percentage 
is spent on foods, and a technological revolution in agricultural 
production that has by no means spent its force. 

1 On the prospective influence of industrial expansion on the terms of trade of 
primary products, Colin Clark raises a dissenting voice. Cf. his Economics of 
1960, Macmillan & Company, Ltd., London, 1942, p. 289. It is his prediction 
that the period 1945 to 1960 will exhibit the following phenomena: 

(1) large international capital movements; (2) full employment; (3) great 
expansion of the volume of world trade; (4) outflow of labor from primary into 
secondary and tertiary industries at a higher rate than before; (5) improvement 
of the terms of trade in favour of primary production. 

2 The argument of the next two pages draws heavily on Schultz, op, ciL, par- 
ticularly Chaps. 3, 4 and 5. 

. 175 • 

Controlling World Trade 

In a scientific and technical environment, the greater 
productivity of economic resources through mechanization 
is not Umited to industry. The increase in agricultural output 
over the last few decades, in the United States and elsewhere, 
has been accompanied by a continued decline in the farm 
population responsible for this increase. The war experience 
in this country and Great Britain has shown how great, under 
favorable circumstances, the agricultural output per man can 
be. With a decline in the American farm population of about 
five million, agricultural output increased by more than 25 
per cent. 

Full realization of the potential productivity of agricultural 
resources depends on an adequate demand for agricultural 
products. The demand for foodstuff's is determined generally 
by the size of the population and by per capita income. In 
contrast to most manufactured products, however, consump- 
tion of many staple foodstuff's does not increase rapidly with 
increased income; in technical language, the income elasti- 
city of demand is low. This being true, productivity per man 
in agriculture can attain its potential rate of increase only 
if industrial production and employment are sufficiently ex- 
panded to provide jobs for that part of the farm population 
that should be displaced by technical improvements in agri- 
cultural production.^ For more than a decade preceding the 
war, however, the rate of industrial expansion was not nearly 
rapid enough to draw off the farms the numbers that should 
leave. The result has been a surplus population in agriculture 
and a physical output per man far below the potential. Over- 
production of farm products and consequent low prices have 
tended to produce a value output per man that falls even 
further below what is possible and desirable. 

This is the nub of the persistent farm problem in the United 
States and elsewhere. Here, however, we are concerned not 

1 It is Schultz's view that agriculture can be fairly prosperous in the United 
States in the first two decades after the war only if the "rate of increase in non- 
agricultural output reaches 4 to 6 per cent per year." Op. cit., p. 126. 

. 176 • 

Outlook for Particular Raw Materials 

v/ith the farm situation as a whole but with its effects on the 
output and prices of some important internationally traded 
foodstuffs. Short of an unexpectedly rapid rate of industrial 
expansion, postwar international trade will be confronted 
with the same persistent surpluses of wheat, sugar and coffee, 
and perhaps by the recurrent surpluses of rice, cocoa and tea 
that marked the prewar period. The great expansion in the 
output of fats and oils during the war is likely to create a sur- 
plus of these agricultural products as well. 

Wheat. A chronic surplus of wheat has plagued the world 
for nearly twenty years. Since 1926 our production has tended 
to run ahead of consumption, with a constant increase in 
carry-over stocks broken only by the crop failure caused by the 
droughts of 1934-1936. The collapse of wheat prices during 
the depression led to an intensification of national price- 
supporting measures in most of the important wheat-producing 
countries of the world and was responsible for the conclusion 
of the unsuccessful International Wheat Agreement of 1933. 

The four chief wheat exporters of the world are Canada, 
Argentina, Australia and the United States. The table below 
presents for selected periods the data on average yield, pro- 
duction, exports and carry-over of wheat for these four 

The carry-over into the 1944-1945 season was reduced to 





Acreage sov/n, mil- 

lion acres 





Yield, bushels per 






Production, million 






Net exports, million 






Carry-over stocks, 

million bushels . . 

Not available 





Controlling World Trade 

1,200 million bushels by the heavy utilization in the United 
States of wheat for feed and for industrial purposes. Wheat 
shipments for European reUef will, until the 1 946 harvest, be 
limited only by transportation capacity in the United States 
and by the capacity of such ocean shipping as is available. 
An additional demand, created by extensive crop failures in 
1945 throughout the Mediterranean basin and parts of the 
Balkans, has made further heavy inroads on the 1945-1946 
carry-over. Thus, earlier predictions of high surplus stocks of 
v/heat at this time not only have not materiahzed but the 
world may be faced with a serious deficiency for several years. 

Whether surpluses of wheat will again accumulate, after 
these immediate and unusual demands have been met, will 
depend primarily on government policies of the principal 
wheat-producing countries. Although the demand for wheat 
as a source of food is inelastic both to a decrease in price and 
to an increase in income, the consumption of wheat can be 
greatly increased in countries in which wheat is a staple food 
grain by allowing prices to decline sufficiently to stimulate its 
continuing use as an animal feed. At lower prices, moreover, 
wheat might also be substituted for other food grains in areas 
in which it has not hitherto been an important element in the 
human diet. Prices low enough to produce a steady increase 
in wheat consumption imply an abandonment of government 
price support as a means of supporting farm income. If this 
reversal of policy can be brought about, there is little reason to 
fear a continual surplus of wheat. A perpetuation, however, 
of the price-supporting policies of the 1930's in the principal 
wheat-producing countries of the world will make a continua- 
tion of the surplus inevitable. 

Sugar. Although the United States is, on balance, a large 
importer of sugar, our island possessions, Cuba, and the Phil- 
ippines are large exporters. We have a strong producer as 
well as consumer interest in the postwar sugar situation. 

During the war, partly because of the very large industrial 
consumption of sugar, production within the Allied supply 

. 178 • 

Outlook Jot Particular Raw Materials 

area has not been able to keep pace with requirements. 
Stocks have declined and are now at a low ebb. The require- 
ments of Western Europe and an inevitable delay in the re- 
appearance of exports from Southeast Asia will keep sugar 
scarce for at least two years. 

The likelihood is, however, that the prewar world sugar sur- 
plus will reappear as soon as European beet sugar returns to 
full production and Far Eastern sugars re-enter world trade. 
Although the Brussels Sugar Convention of 1902 — an early 
international commodity agreement to control surplus sugar 
production — reduced trade barriers and curtailed high-cost 
beet sugar production, sugar stocks accumulated and prices 
fell before the First World War. That war witnessed an 
enormous expansion in sugar production in the West Indies 
under the impetus of fantastically high prices. After the war, 
American tariff policy encouraged production in Cuba, 
Puerto P.ico, Hawaii and the Philippines. By preferential 
tariff and direct subsidy, sugar production was also stimulated 
in the British Empire. European beet sugar production was 
quickly restored under tariff protection that reached higher 
than prewar levels. The development of improved strains per- 
mitted exceedingly low-cost sugar production to expand in the 
East Indies. 

The necessary adjustment of sugar output to sugar con- 
sumption has always been, and will continue to be, handi- 
capped by national security policies favoring domestic pro- 
duction and by the overexpansion of cane production in 
undeveloped areas that offer no effective alternative employ- 
ment for local resources. 

Rice.^ Apart from wheat, rice is the only unprocessed food- 
stuff of which the United States is a substantial exporter. 
Before the war surpluses of rice were sporadic and local rather 
than persistent and general. The United States, which pro- 

1 Cf. V. D. Wickizer, Rice in the Western Hemisphere; Wartime Developments and 
Postwar Problems (Food Research Institute), Stanford University Press, Stanford 
University, Calif., 1945. 

. 179 • 

Controlling World Trade 

duced an average of about 50 million bushels a year and con- 
sumed about 40 million, was experiencing difficulties in ex- 
porting its surplus output. Prices were supported domestically 
by purchases of the Federal Surplus Commodities Corpora- 
tion. Consequently stocks in this country were high at the out- 
break of war. The loss of Far Eastern sources, however, made 
rice an extremely scarce article in United Nations territory. 
Under the incentive of high wartime prices, output in the 
United States increased to around 70 million bushels and was 
expanded wherever growing conditions were propitious, in the 
Western Hemisphere as well as in India and Egypt. Most of 
this war-induced output — and certainly that of the United 
States — will not be able to meet the competition of low-cost 
Asiatic rice when it againbe comes available in prewar quanti- 
ties. An attempt to continue rice production in the Western 
Hemisphere may well make persistent and general a surplus 
that was local and intermittent before the war. 

Fats and Oils} The loss of Far Eastern sources of fats and 
oils led, during the war, to a great expansion of output in the 
United States and, to a lesser extent, in Latin America. 
Phenomenal increases in the production of soybeans, flaxseed, 
peanuts and lard were mainly responsible for changing this 
country's position from that of a prewar importer of about 2 
billion pounds per annum to that of a net exporter of 1.5 
billion pounds by 1 944. On the continent of Europe, behind 
the blockade, increased production of oilseeds went far toward 
replacing the 4 billion pounds of fats and oils formerly im- 
ported from Asia, Africa and South America.^ 

As with other foodstuffs, the present situation is one of 
shortage. However, when 3 billion pounds of fats and oils be- 

1 This group of products is made up of the yield of a large number of oilseeds, 
nuts and animal fats. The more important part of these are edible fats and oils. 
The principal industrial use of inedible oils is for soapmaking and for paints, 
varnishes and lacquers. 

2 Cf. Karl Brandt, Fats and Oils in the War (War-Peace Pamphlets, No. 2) 
(Food Research Institute), Stanford University Press, Stanford University, 
Calif., 1942, pp. 18-26. 

• 180 • 

Outlook Jor Particular Raw Materials 

gin to flow again from the Far East, and when the whaling 
industry resumes its prewar annual output of approximately 
1 billion pounds, the shortage in supply will rapidly disappear. 

Although wartime expansion will perhaps leave fats and 
oils in surplus, a continuation of the per capita increase in 
consumption may make this surplus short-lived. The heavier 
proportion of total calories in the human diet represented by 
fats constitutes one of the most important recent shifts in diet. 
The industrial use of fats and oils, principally in soapmaking 
and in paints and varnishes, is likely also to continue at a 
fairly high level so long as increased incomes are generally 

Coffee. The most spectacular prewar agricultural surplus 
was undoubtedly cofl'ee. During the 1930's Brazil, in an 
attempt to balance production and consumption, destroyed 
nearly 71 million bags of low-grade coff'ee, the equivalent of 
nearly three years' total world consumption. 

The loss of the European market, normally accounting for 
about 10 million bags a year, might have been expected to lead 
to a tremendous accumulation of stocks during the war. 
Actually, a number of factors prevented a critical surplus from 
developing in this hemisphere: the additional destruction of 
7 million bags of Brazilian coffee between the beginning of 
1941 and the end of 1944; the extraordinarily low yields of 
Brazilian cofl'ee from the crop year 1942-1943 through the 
crop year 1944-1945 and a falling ofl* in cofl'ee production 
outside Latin America; and finally, an extremely high rate of 
consumption in the United States. As a matter of fact, al- 
though exact totals are lacking, the carry-over of Brazilian 
coffee appears currently to be less than for the crop year im- 
mediately before the war. Against this, however, has to be set 
a wartime accumulation in other coffee-producing countries 
of unreported stocks that may total several miUion bags. 

Before the war the coffee surplus was pretty much limited to 
Brazil, and in all probability it will continue to be most acute 
there. Coffee production in Latin America outside Brazil 

. 181 • 

Controlling World Trade 

has increased steadily as consumer taste has come to favor the 
milder Central American blends, and coffee production outside 
Latin America will, in all probability, recover its position in 
world markets. How much of a surplus can then be antici- 
pated will depend primarily on how successfully Brazil can 
divert agricultural resources away from coffee and into other 

Tea and Cocoa. In tea and cocoa, as in coffee, America has 
a strictly consumer interest. But whereas we account for less 
than 10 per cent of world tea consum.ption, we account nor- 
mally for nearly 50 per cent of total coffee consumption and 
nearly 40 per cent of world cocoa consumption. 

Before the war, 80 per cent of the world's tea production was 
under control of the International Tea Committee, which set 
export quotas, limited planting and prohibited the export of 
tea seeds and slips. ^ Meanwhile, tea production in areas 
outside the agreement, notably China, Japan, Portuguese 
East Africa and French Indo-China, was rapidly increasing. 
In the absence of control, this widespread production would 
almost certainly drive tea prices to very low levels. 

Although cocoa was in recurrent surplus for 1 5 years before 
the war, it seems probable that the future will see production 
and consumption more evenly balanced. During the war the 
West African plantations, which supply two-thirds of the nor- 
mal world export of cocoa, have been neglected, and restoration 
of full production in this area will require five or six years. 
However, production in Latin America, which provides the 
rest of the world's supply, has been well maintained. The 
United States may presently be faced with a British West 
African export monopoly^ and, should cocoa again show signs 

1 Cf. V. D. Wickizer, Tea under International Regulation (Commodity Policy- 
Studies, No. 4) (Food Research Institute), Stanford University Press, Stanford 
University, Calif., 1944. 

2 Cf. Report on Cocoa Control in West Africa 1939-43 and Statement on Future 
Policy, Report to Parliament by the Secretary of State for the Colonies, Cmd. 
6554. Cf. also a comment by Isaac Witkin, President of the New York Cocoa 
Exchange, Journal of Commerce, Nov. 1, 1944. 

. 182 . 

Outlook for Particular Raw Materials 

of being produced in surplus, an international agreement may 
be proposed by cocoa producers. 


Foodstuffs constitute about four-fifths of total agricultural 
output in the United States and in the world; the remaining 
one-fifth flows into consumption as industrial raw materials. 
Of these, cotton, wool and rubber are the most important, 
and all three promise to present serious postwar surplus 

The conditions under which these materials are produced 
correspond in general to those governing other agricultural 
products; rubber alone is exceptional in that about 50 per cent 
of crude rubber output comes from plantations typically 
operated as large units. All three, however, exhibit the same 
lack of response of production to falling prices that is char- 
acteristic of agricultural products. Once expanded, output 
usually continues to remain high over a long period regardless 
of economic conditions. Consumption of these materials, 
however, exhibits a greater cyclical fluctuation than does the 
consumption of most foodstuff's.^ Over the long run, more- 
over, consumption tends to rise with rising incomes, or 
rather it would, were it not for the increasing availability of 
synthetic substitutes. 

An overshadowing threat to the prospective demand for all 
three of these materials is, in fact, the emergence in recent 
years of synthetic fibers and of synthetic rubber. Here lies 
one of the principal sources of probable postwar surpluses. 

Cotton, The world cotton situation from the late 1920's 
to the beginning of the Second World War was marked by in- 
creasing production, less rapidly increasing consumption, and 
accumulating stocks. During this period, the United States 

1 Since, however, the end products of these materials are in the main non- 
durable, or semidurable goods — textile fabrics, clothing, tires, etc. — variations 
in consumption are not extreme. 

• 183 • 

Controlling World Trade 

share in world production fell sharply, and our share in world 
exports more sharply still. 

Production, Exports and Carry-over of Raw Cotton 
(million bales) 


Production: Total world . . 

United States . 


Exports: Total world. .. 

United States. 


Carry-over: Total world . . 

United States , 











The highest prewar carry-over of 22.7 million bales for the 
world followed the crop season of 1938, but during the war 
even this figure was surpassed. The carry-over on Aug. 1, 
1944, was 25.8 million bales, and the estimated carry-over on 
Aug. 1, 1945, was 27 million bales. The location of this 
accumulated cotton, however, shifted during the war. The 
slight increase in stocks held in the United States is accounted 
for by the extraordinarily high wartime mill consumption in 
this country and by continued limitations on output. Else- 
where in the world stocks rose from about 9.5 million bales in 
1940 to more than 14 million bales in 1944, with the largest 
increase traceable to Latin America. 

These very high stocks of cotton will be facing rather 
drastically reduced import requirements. For many years be- 
fore the war, world exports and imports were remarkably 
stable at around 1 3 million bales per annum. Unless and until 
mill consumption is restored in Europe and Japan, it is diffi- 
cult to see where a demand will develop for a postwar export 
of more than 9 million bales; and restoration of European and 
Japanese cotton consumption to anything like the prev/ar 

. 184 • 

Outlook for Particular Raw Materials 

figures seems extremely remote at this time. During the war 
rayon took the place of cotton for so many uses that it is 
doubtful whether cotton ever can or will regain its prewar 
position. Furthermore, the long-run geographical trend of 
cotton textile production is toward the raw-cotton-producing 
countries. This shift will tend permanently to reduce the need 
for cotton exports and imports. 

Furthermore, in the absence of effective controls, the post- 
war cotton surplus may be further aggravated by a chronic 
overproduction of cotton. The decline in American output has 
been more than offset by increases elsewhere, principally in 
Brazil, China, Russia, India and Egypt. Expansion of 
acreage has also been accompanied by technological improve- 
ments in production, both here and abroad. Improved 
varieties, increased use of fertilizer and, in this country, 
methods of soil conservation have all increased the yield per 
acre. The United States appears, in fact, to be on the verge 
of an extensive mechanization both of the cultivation and 
harvesting of cotton. Since machine operation will sub- 
stantially lower costs, we may expect, unless restrictions are 
imposed, an inevitable increase in the acreage devoted to 

Given favorable economic conditions, an absence of synthetic 
substitutes, and moderate prices for cotton, it is possible, 
though improbable, that increased consumption could keep 
pace with unregulated production. What is certain, however, 
is that synthetic fibers will continue to supply an ever greater 
part of textile requirements, and it is highly probable that 
governmental price supports for cotton will be maintained 
long after the war. 

From a cotton equivalent of 2.5 million bales in 1935,^ 
world rayon production increased to an equivalent of more 
than 5 million bales in 1939, of more than 8 million bales 
in 1942, and the end is not in sight. Other synthetic fibers will 

1 On the assumption that 425 pounds of rayon equals 500 pounds of cotton 
gross weight. 

• 185 • 

Controlling World Trade 

enter the postwar market in volume too, assisted, no doubt, as 
rayon is, by governmental policies that are effectively pricing 
cotton out of the market. It is only fair to point out, however, 
that even in the absence of any restriction the resources that 
would be turned over to cotton are enough to glut the market 
with an output that would bring prices very low indeed. This 
tendency to overproduction, plus the size of the present carry- 
over, adds up to a surplus problem of serious dimensions. 

Wool. Although synthetic fibers cannot be so directly sub- 
stituted for wool as for cotton, it follows from the very nature of 
textile competition that the expansion of synthetic consump- 
tion will also undoubtedly reduce the consumption of apparel 
wools. The production of wool, however, is not subject to that 
chronic overinvestment of resources that characterizes cotton. 

The surplus that faces wool producers is almost entirely the 
result of the war. The European markets that used to absorb 
more than 1 billion pounds annually have been cut off for 
five years, and Japan, which absorbed roughly 0.25 billion 
pounds, has been shut off for three years\ In the meantime, 
wool production, encouraged by high prices, has expanded 
in all the principal producing countries. In Australia, New 
Zealand, South Africa, Argentina and Uruguay, the five 
leading export nations, output increased during the war by 
about 12.5 per cent.^ Consequently, despite a very high rate 
of consumption in Great Britain and the United States, stocks 
of raw wool increased at the rate of about 500 million pounds 
a year all during the war period. On Oct. 1, 1945, world wool 
stocks totaled around 4 billion pounds as compared with 
average prewar stocks of slightly over 500 million pounds. 

If and when the support of war-induced price levels is re- 

1 All weights quoted here are on a grease basis. Scoured wool weighs about 56 
per cent of wool in the grease. 

2 U.S. Tariff Commission, United States Stockpile Wools (War Changes In In- 
dustry Series, Report No. 3), Washington, D.G., 1944, p. 5. The Australian wool 
clip, however, was adversely affected by drought in 1944-1945 and may be 
lower still in 1945-1946. 

• 186 • 

Outlook for Particular Raw Materials 

moved, the production of wool may decline somewhat and, as 
before the war, remain pretty well balanced by consumption/ 
Even under favorable circumstances, however, it will require 
a good many years, and wise management, to dispose of the 
huge war-created surplus without endangering the livelihood 
of wool growers. 

Rubber. As has been noted earlier, the postwar prospects 
for rubber depend primarily on what is done with synthetic 
capacity in the United States.^ If no more than 200,000 to 
400,000 tons of synthetic is held in production, there should be 
no critical surplus of rubber even after production in the Far 
East is completely restored and the restocking period is over. 
If the United States, on the other hand, seeks to maintain 
synthetic production at anything like its total capacity, a 
serious rubber surplus is unavoidable. 

The rubber problem prewar was not so much one of an in- 
adequate price level as of highly variable prices; for this 
variability, the vagaries of rubber control were in part re- 
sponsible. The trend of rubber consumption was strongly 
upward, and demand may be expected to increase rapidly with 
an increase in incomes. Favorable postwar economic con- 
ditions should insure a high volume of consumption and, given 
sensible policies with respect to synthetic capacity, an in- 
creased demand should prevent the emergence of a rubber 
surplus of any extensive proportions. 

1 In the United States the ceiling price for wool, maintained by purchases of the 
Commodity Credit Corporation, exceeds the import price plus the 34 cents per 
pound (scoured basis) duty. Consequently, mills are meeting their requirements 
from import wools and practically the whole of the domestic clip is moving into 
government stocks. CCC purchases are scheduled to continue through June, 
1946. Cf. W. L. Clayton, "Effect of the Wool Market on Foreign Economic Re- 
lations," U.S. Department of State Bulletin, Vol. XIII, No. 335 (Nov. 25, 1945). 

2 An extensive discussion of the prewar and war development in rubber is 
contained in the U.S. Tariff Commission, Rubber (War Changes In Industry 
Series, Report No. 6), Washington, D.C., 1944. Cf. also K. E. Knorr, World 
Rubber and its Regulation (Commodity Policy Series, No. 6) (Food Research In- 
stitute), Stanford University Press, Stanford University, Calif., 1945. 

• 187 . 

Controlling World Trade 

Mineral raw materials are characterized by supply and de- 
mand conditions that differ widely from those governing the 
production and disposal of agricultural crops. Since these 
materials are customarily fabricated into products of great 
durability, demand fluctuates violently with the cycle. On 
the other hand, the consumption trend for most of the im- 
portant mineral products, and particularly for light metals, is 
strongly upward. Since the income elasticity of demand for 
these products tends to be high, the postwar prospects for most 
minerals will very largely reflect general economic conditions. 
Although the production of minerals is not subject to the 
weather hazards that beset agriculture, unforeseeable dis- 
coveries of new deposits and the exhaustion of old bring 
hazards of their own. Difl'erences in production costs among 
difl'erent deposits may be no greater than geographical cost 
differences in agriculture; but because accurate cost calcula- 
tion is more nearly possible and plays a larger role in mining 
than in agriculture, the extractive industries inevitably include 
a segment of high-cost producers and high-cost areas that 
come into and go out of production as prices change. 

The concentration of control in most mining and metal 
industries also facilitates swifter adjustment of production to 
variations in demand. In 1932, for example, world copper 
production was cut to 20 per cent of capacity. Similarly, as 
the experience of the war years testifles, output expands rapidly 
with increasing demand. 

In the last few decades, scrap metal has supplied an increas- 
ing proportion of total requirements and in the postwar period 
the scrap yield for most metals will be extraordinarily high. 
There is, however, a considerable variation among the metal 
industries in the utility of scrap as a substitute for virgin metal. 
Copper scrap, for example, is about as usable as the newly 
mined material; magnesium scrap, on the other hand, sufl'ers a 
40 per cent loss in recovery. The markets for almost all metal 
products, however, will be overshadowed for some time by 

• 188 . 

Outlook for Particular Raw Materials 

existing stocks and the prospect of large-scale recovery of 
scrap. Governmental sur plus-ma terial-disposal policies can 
help considerably toward stabilizing these markets and sus- 
taining production by impounding the bulk of government- 
owned stocks in strategic stockpiles. Prospective postwar 
surpluses will then be far less likely to develop. The existence 
of war-produced stocks in different countries may necessitate 
intergovernmental consultation and cooperation with respect 
to a number of metals. 

Copper. During the war, annual world production of re- 
fined copper was running at around 3 million tons, as com- 
pared with prewar production, in favorable years, of slightly 
more than 2 million tons.^ This greater volume has been 
possible only through the continued operation of high-cost 
properties both here and abroad. At the war's end, U.S. 
stocks of virgin copper, in government and industry hands, 
were somewhat in excess of 800,000 tons. The yield of new 
scrap in munitions production is unusually high, and in the 
United States during the war years recovery ran at the rate 
of about 500,000 tons a year. The total output of virgin copper 
plus new scrap — 1,300,000 tons — is nearly twice the annual 
consumption of copper in this country under favorable con- 
ditions. In addition, one consequence of the very high con- 
sumption of copper during the war will probably be an un- 
usually large recovery of the old scrap for some time to come. 

Although world copper consumption under prosperous 
postwar economic conditions may well be considerably over 
2 million tons a year, and though strategic stockpiles may 
absorb a few hundred thousand tons, it appears inevitable 

1 Estimated world production in millions of metric tons, Statistical Tearbook of 
the League of Nations , Geneva, 1945, p. 161: 


Production, million tons 










Controlling World Trade 

that a sizeable surplus will overhang the market for the next 
few years. 

Whether, after this transitional period, world consumption 
will justify fairly full operation of war-expanded capacity will 
depend to a very great extent on prevailing economic con- 
ditions. Consumption of copper, in common with that of 
other metals, is much more responsive to changes in income 
than the consumption of agricultural products, particularly 
foodstufFs. The difference between prosperous and only 
moderately prosperous conditions throughout the world can 
account for a difference as great as 1 billion tons of annual 
copper consumption, that is, for one-third of world copper 

Regardless, however, of the rate of consumption, postwar 
surplus stocks are not likely to overhang the market indefinitely. 
Copper output declines rapidly with a fall in price — another 
characteristic in which metals differ sharply from agricultural 
products — and is readily adjusted to changes in the rate of 
consumption. Of the four great copper-producing areas of the 
world, the United States, Canada, Rhodesia-Belgian Congo 
and Chile, the United States has definitely the highest costs. 
Consequently, low copper prices will probably be accom- 
panied by a greater contraction of output in the United States 
than in other areas. 

After the First World War, American copper producers 
solved the problem of war-induced surplus stocks by a tempor- 
ary curtailment of practically all mine operations in the United 
States and by the creation of a buying and selling pool that 
functioned until 1923. Cartel operations, in which American 
companies actively participated, marked the period 1926- 
1929; and from 1933 to 1937 American producers cooperated 
with a foreign copper cartel to control prices by limiting ex- 
ports from the United States. In the absence of a strong 
governmental anticartel policy, there is a fair probability 
that similar arrangements may be resorted to in dealing with 
the existing postwar surplus situation. 

. 190 • 

Outlook Jor Particular Raw Materials 

Tin. Since 1931 tiniias been produced under a tight inter- 
governmental agreement in accordance with which produc- 
tion quotas are assigned to all the major tin-producing 
countries of the world/ It is not possible to say what the out- 
put or price of tin would otherwise have been, but the rapid 
jump in production to meet stockpile requirements in 1940 
and 1941 suggests the extent of normal underutilization of 
capacity.^ But, whatever the price might have been, tin con- 
sumption would have been very little affected, since the price 
of tin is an extremely small fraction of the cost of most of the fin- 
ished articles into which it is fabricated.^ Although precise data 
regarding costs are not available, it is known that the Bolivian 
mines are the high-cost producers and that sources in Malaya 
and the East Indies could profitably meet total world re- 
quirements at prices much lower than those sanctioned by 
the International Tin Committee. 

The present situation is extremely tight, and for a few years 
following the war consumption of tin will undoubtedly be 
high. After the restocking period, a tin surplus may develop in 
the sense that unregulated output could bring prices down too 
low to cover the high costs of Bolivian producers — but only 
in that sense. It might be argued, therefore, that in this sur- 

1 For a history of international tin control, written from the producers' point 
of view, see International Tin Control and Buffer Stocks, The Tin Producers' Associa- 
tion, London, 1942. 

2 Tin production, in long tons. 

Tear Production 

1938 163,000 

1939 176,000 

1940 236,000 

1941 245,000 

^ The exceptional volatility of tin prices is, as Yates observes, chiefly due to 
the smallness of the stocks that are customarily held. "Tin is such an expensive 
commodity that no producer holds more than a few hundred tons; nor do consumers 
worry about holding stocks, since to most of them the price of tin is, as mentioned 
earlier, immaterial to the price of the articles they manufacture. Hence, any 
quite small change in demand or a rumor of some trifling change in supplies 
\vill have an utterly disproportionate influence in price movements." Yates, 
op. cit., p. 143. 

. 191 • 

Controlling World Trade 

plus problem the United States has nq interest; actually, how- 
ever, the situation is not that simple. We have a security 
interest in protecting tin sources within our strategic area, and 
we have a political interest in a stable Bolivian economy. 
Our government-owned Texas City Sirielter could be main- 
tained as stand-by capacity, whatever happens to the sources of 
tin. Our security interests in Bolivian tin and our political 
interests in Bolivian prosperity might both be guaranteed by 
acquiring these properties as stand-by capacity and by trans- 
ferring the tin miners to such other employment as an American- 
financed developmental program might provide. A program 
of these dimensions would, no doubt, be expensive. J Since, 
moreover, there is no assurance that the tin agreement would 
become inoperative without the support of Bolivian producers, 
we would still continue to import our tin in peacetime at 
prices determined by the International Tin Committee. 
Positive measures that will assure our tin position in peace and 
war can probably only be undertaken in cooperation with the 
principal tin-producing countries of the world. 

Nitrates. Of the natural product nitrogen, the only im- 
portant export source is Chile. Even before the war, however, 
synthetic nitrogen capacity plus the yield of by-product 
nitrates was more than adequate to meet world peak demands, 
so that Chile's position in the international market was main- 
tained only by cartel arrangements limiting European syn- 
thetic production. Wartime demands have enormously 
expanded synthetic capacity in Europe and the United States. 

Although the consumption of nitrogen for agricultural and 
industrial uses should, under favorable economic conditions, 
be substantially larger after the war than before, it will still be 
inadequate to absorb the full output of the industry's expanded 
capacity. Introduction of the new Guggenheim process has 
reduced the cost of Chilean nitrates to such an extent that, on 

1 Bolivian tin reserves, however, are estimated at not more than 500,000 tons. 
Since the drainage of the mines is good it is thought that they could be held as 
stand-by capacity without serious deterioration. 

• -192 . 

Outlook for Particular Raw Materials 

a cost basis, Chile may be able to export to the American 
market in customary prewar volume. If, however, we convert 
our government-owned plant or any large fraction of its 
production, the net effect will be seriously to jeopardize 
the position of Chilean nitrates in this market. The European 
market for natural nitrates will be small or nonexistent, 
while postwar European excess capacity will be large. ^ 

Aluminum and Magnesium. No conceivable expansion in con- 
sumption can eliminate the vast excess production capacity 
that already exists for both aluminum and magnesium. In 
fact, despite continued high requirements, government-owned 
aluminum and magnesium plants were already closing down 
before the end of the war. The Tariff Commission foresees a 
maximum domestic consumption of magnesium of 65 million 
pounds a year in the postwar period, as against a present 
capacity of 500 million pounds.^ As for aluminum, consump- 
tion in the United States might reach 700 million pounds 
yearly as compared with existing capacity of 2,300 million 

Apart from excess capacity, there will be the difficult prob- 
lem of disposing of accumulated stocks. On V-J Day the 
United States government held about 63 million pounds of 
magnesium, an amount almost equal to estimated maximum 
postwar annual consumption; industry's stocks were also 
large. ^ Government-owned stocks of aluminum were about 
400 million pounds on V-J Day, and metal stocks within the 
industry were in the neighborhood of 700 million pounds.* 
Secondary recovery was running at the rate of 650 million 
pounds annually, and stocks in the hands of scrap dealers 
were large. Indeed, the inevitably high rate of scrap recovery 

1 The case of nitrogen is discussed at greater length in Chap. VII. 

2 U.S. Tariff Commission, Magnesium (War Changes in Industry Series, 
Report No. 10), Washington, D.C., March, 1945. 

^ J. A. Krug, Production; Wartime Achievements and the Reconversion Outlook, WPB 
Document, No. 334, October, 1945, p. 69. 

4 Ibid., p. 66. 

• 193 . 

Controlling World Trade 

will constitute a serious obstacle to aluminum producers for 
at least a few years after the war. The competition of mag- 
nesium scrap is much less formidable because a considerable 
loss is sustained in remelting. 

National policy will have to cope with a situation involving 
the disposal of government-owned plants and surplus stocks of 
both metals, the transfer of labor resources to other employ- 
ment and a possible postwar monopoly. With a cessation of 
subsidized government production, there will probably be no 
more than two or three postwar producers of ingot aluminum, 
nor more than two producers of magnesium. 

Excess aluminum capacity and surplus stocks will not be 
limited to the United States. Although all the principal com- 
batants expanded their production of both metals during the 
war, the magnesium potential outside the United States will 
probably not exceed the demands of domestic consumption 
plus military stand-by requirements. Before the war, various 
methods of protecting national aluminum capacity in Europe 
were supplemented by a tight aluminum cartel, which re- 
served the domestic market to domestic producers, divided 
the competitive export market and fixed minimum prices. 
European magnesium production has been subject to the same 
tight control by cartel arrangement. 

Lead and ^inc. Given reasonably prosperous economic con- 
ditions and a relatively free movement in international trade, 
no serious world surplus is in prospect for either lead or zinc. 
But should producers in the United States attempt to main- 
tain the high-cost output called for by war requirements, a 
surplus problem might develop, at least for zinc. Low-cost 
sources of both lead and zinc are approaching exhaustion in 
the United States, and our long-run interest clearly demands 
that we conserve our dwindling supplies by importing a larger 
proportion of our peacetime requirements. Lead production 
in this country is not protected by tariff, and in the years 
before the war the relatively light duties on zinc did not 
discourage a trend toward greater imports. 

• 194 • 

Outlook for Particular Raw Materials 

Government-held reserve stocks of lead amounted to no 
more than 70,000 tons on July 1, 1945, and anticipated world 
requirements to the end of 1 946 promise to exceed the available 
supplies/ The shortage is expected to result from the loss of 
certain European supply sources within the Russian security 
zone and destruction of facilities elsewhere. Even after 1 946, 
lead production may lag behind if consumption is stimulated 
by favorable economic conditions. 

As compared with lead, stocks of slab zinc in the United 
States are much larger both absolutely and in relation to 
annual consumption. On Jan. 1, 1945, they amounted to about 
350,000 tons. Stocks in England are also large, while Euro- 
pean zinc requirements for reconstruction can very possibly 
be satisfied by the very heavy zinc yield from reclaimed mili- 
tary brass scrap. Zinc may therefore be in substantial sur- 
plus for the next few years, even with the abandonment of 
premium prices, and any attempt on the part of the United 
States to maintain its high-cost output would make such a 
surplus a certainty. 

The increase in the proportion of output supplied by scrap, 
now a characteristic of most metal industries, is particularly 
striking in the case of lead. Since it is estimated that, by 1950, 
70 per cent of domestic requirements can be met by scrap, 
production of the virgin metal is likely to become unstable. 
A 30 per cent decline in consumption might eliminate the 
market for primary metal altogether. 


The word "surplus," as it has been used in the foregoing dis- 
cussion, requires clarification. The first and simplest use is in 
connection with stocks. Surplus stocks are those which are 
larger than the normal carry-over from one crop season to an- 
other, or larger than is required for the maintenance of current 
operations. Both "normal carry-over" and "requirements for 

1 Wcir Production Board, Post V-J Dav Outlook for Lead^ August, 1945. 

• 195 • 

Controlling World Trade 

current operations" are terms whose careful definition could 
justify lengthy discussion, but the stocks with which we are 
here concerned — mainly war-induced — are too obviously 
surplus to require discussion. The statement, for example, 
that stocks of cotton and magnesium will be in surplus in the 
postwar period hardly needs extended definition. 

The word "surplus" has also been applied to a rate of pro- 
duction that persistently exceeds the prevailing rate of con- 
sumption. Surplus in this sense is, of course, possible only if 
output is competitively produced and then is deliberately held 
ofi^ the market. Given the degree of producers' control that 
exists in most manufacturing and mining industries, output 
will be adjusted to the rate of consumption and no persistent 
excess will develop. Under competitive conditions, such an 
excess can only materialize if the output produced is withheld 
from the market — as, for example, cofi'ee has been withheld 
and destroyed and cotton has been withheld by being stored 
in vast quantities. Any output, within reasonable quantitative 
limits, can be disposed of at some price. If, however, the market 
can be cleared only at prices consistently lower than some 
authority considers desirable, then a failure to adjust price 
levels downv/ard will result in a continuing excess of pro- 
duction over consumption. Consideration of a "price lower 
than is desirable" leads us to a third and more fundamental 
way in which the word "surplus" is here used. 

An industry's persistent employment of more rescurces than 
can, with efi*ective utilization, earn a normal return is the 
underlying basis for "chronic surplus." In agriculture the 
principal resource whose return falls short of that awarded the 
same quantity and quality of service in other employments is 
labor. Statistics on the relative earnings of the agricultural 
labor force over the two prewar decades point clearly to an 
underutilization of labor in agriculture. The most con- 
spicuous indication of a developing surplus in particular manu- 
facturing industries is usually the inadequacy of the return to 
capital. This may or may not be accompanied by unemploy- 

. 196 • 

Outlook for Particular Raw Materials 

ment, depending on conditions in the rest of the economy and 
on the mobility of labor out of the industry. 

Despite the existence of underutilization of labor in agri- 
culture and the underutilization of capital in manufacturing — 
both characteristic of a surplus situation — there may, of 
course, continue to be opportunities for the profitable em- 
ployment of labor in agriculture and of capital in industry; 
the term "industry" covers a segment of very varied economic 
operations. However, should the surplus become chronic and 
serious, these profitable opportunities will be relatively few. 
If industries were arrayed in the order of their payments (or 
returns) to similar factors of production, evidence that certain 
industries remained year after year at the bottom of the scale 
would indicate the existence of chronic surplus in the sense 
in which we are now using the term. 

The usage of surplus in connection with stocks is techno- 
logical. It means the quantity in stock over and above that 
which current practice requires to be held by processors, dis- 
tributors and consumers. The second use of surplus is political. 
The amount of surplus production is determined by the 
difference between a "desirable" price and a price that would 
clear the market. The judgment of what is desirable is a 
political judgment and the reasons that underlie it usually 
have to do with the third usage of surplus — as meaning per- 
sistently low relative returns to resources employed in an in- 
dustry. The returns to half of the resources employed 
in the whole economy, however, are always relatively low, 
that is, low relative to the returns of the other half. But even if 
the returns in particular industries remain consistently at the 
lower end of the scale, it does not follow that the indicated sur- 
plus situation falls within the purview of public policy. 

Surpluses become a public concern largely through the 
activities of organized interest groups. To paraphrase the late 
Senator Ashurst, when public authorities see a great light it is 
usually because they feel a great heat. Although the chronic 
surplus complained of by an interest group may be, and usually 

. 197 . 

Controlling World Trade 

is, accompanied by persistently low returns to employed or 
invested resources, the correlation between a surplus con- 
dition, in a proper economic sense, and public action de- 
signed to deal with it is by no means perfect. Postwar policy 
on raw material surpluses, however, must necessarily deal with 
political as well as economic realities. This does not mean that 
the wheel that squeaks the loudest should receive the most oil, 
but it does mean that the soil in which surplus problems grow 
and are ripened for public action is heavily fertilized by the 
activities of political interest groups. 




INTERNATIONAL Commodity agreements have as their chief 
goals the management of surpluses and the stabilization of 
prices. As means to their ends they rely principally on re- 
striction of quantities coming on the market and on storage 
and disposal plans. Today the word "restriction" has an ugly 
sound. It conjures up visions of the untimely death of little 
pigs, the ploughing under of cotton and the burning of coffee. 
The only kind of output reduction acceptable to the mores of 
free enterprise is that produced by market forces, even though 
it may entail bankruptcy, forced sale and eviction. 

A pleasanter word is "adjustment," which has been given 
legislative sanction in our Agricultural Adjustment Act. Ad- 
justment conveys the notion of revision up as well as down, and 
it is true that controlled production of a commodity calls for 
upward as well as downward adjustments — but usually within 
narrower limits than free markets would permit. The best 
international example of adjustments up and down — in this 
case of both production and exports of a controlled commod- 
ity — is to be seen in the operation of the tin agreement. The 
history of this agreement from early 1931 to the middle of 1942 
indicates variations from the basic quotas between a low of 
33 j^ per cent in 1932 and 1933 and a high of 130 per cent of 
quota in 1940 and 1941. No one could reasonably maintain, 
however, that output over the whole period would not have 
been higher under uncontrolled competition than under a 
scheme of controlled adjustment. 

It is necessary to insist upon the essentially restrictive char- 
acter of quota agreements because their proponents tend to 

. 199 . 

Controlling World Trade 

ascribe to international commodity controls the virtues of 
economic expansionism. In the promotional literature, 
phrases commonly used are "maintaining adequate supplies 
for consumers," "orderly adjustment of production," and "a 
planned use of resources." If, however, expansion of the pro- 
duction of raw materials were needed in the postwar period, it 
would be quite unnecessary to negotiate international agree- 
ments. Uncontrolled raw material production responds to 
satisfactory prices — or even to unsatisfactory prices — in a way 
that would obviate any need for such action. In a few cases — 
principally the international fishing agreements — commodity 
agreements, by curtailing wasteful cropping practices, have 
achieved "a planned use of resources" that would otherwise 
have been exhausted. The conservation objeccive is in many 
agreements merely the gilding on a device whose primary 
function is the curtailment of output. This is not to say that 
international commodity agreements must be restrictive; all 
that can be said is that they have been in the past, and that in 
the future, so far as we can see, international governmental 
agreements will not generally be needed to assure the expansion 
of output of a particular commodity. 

The main justification for commodity agreements is that, 
when properly used, they can efi'ect a desired contraction of 
exports and output more satisfactorily than can unregulated 
competition or the uncoordinated eff^orts of a number of pro- 
ducing countries. International commodity agreements, how- 
ever, and a good part of national commodity control policy, 
are phenomena characteristic of a certain stage of economic 
development. In the nineteenth century, an era of expanding 
economies and competitive markets, such surpluses as did 
emerge were both short lived and manageable through ordi- 
nary market adjustments. Expansion in difi^erent industries 
was uneven but resources did not remain persistently under- 
employed in certain sectors of the economy, for more rapid 
advancement in other sectors required their employment 
elsewhere. It would be interesting to consider the question of 

• 200 • 

Buffer Stocks and Quota Schemes 

whether the dechne in competition, along with other in- 
stitutional changes making for increasing friction and mon- 
opoly control, is responsible for a decline in the rate of in- 
dustrial expansion, or whether the line of causation goes in the 
opposite direction. All we need observe here, however, is that 
the rise of institutional impediments to effective market ad- 
justment has gone hand in hand with a decline in the rate of 
industrial expansion. 

If restrictive commodity agreements were unnecessary for 
the management of surpluses under nineteenth century 
capitalism, so also, presumably, would they be unnecessary in 
an economic system that centrally controlled its rate and 
direction of expansion. Unforeseen variations in demand or 
supply might lead to temporary surpluses or deficits, but it is 
unlikely that they would persist in an economy capable of con- 
trolling the volume of production and utilization of resources. 
The only way to avoid, in normal times, the need for restrict- 
ing raw material output either nationally or internationally 
is to maintain a rate of industrial expansion capable of ab- 
sorbing an increased volume of raw materials and providing 
employment for such resources as are not needed in their 
production, i To adopt this as a public policy, however, would 

1 The report of the International Labour Office on Intergovernmental Commodity 
Control Agreements^ op. cit., p. XXXVI, grants that "one commodity planning 
inevitably tends toward restriction by one or more such devices as restrictions 
on current output or exports, the destruction of supplies, restrictions on new 
productive capacity, the financing of producers so that they can hold supplies 
from the market, and the allocation of markets." 

The report, however, takes the view that this restriction would be avoided 
by the constitution of "a general international commodity control organiza- 
tion . . . The broad effect of the introduction of such a general commodity con- 
trol organization would be to make the schemes for particular commodities tools 
for the execution of a comprehensive policy framed as a part of a general pro- 
gramme of international economic and social development." 

If, however, as the author believes, the principal reason for the persistence 
of raw material surpluses is an inadequate rate of industrial expansion, such a 
general commodity organization is not likely to avoid the necessity of continued 
restriction. At best, as will be developed later, it can only prevent or limit cer- 
tain types of restriction and perhaps shape control schemes in ways that will in- 

• 201 • 

Controlling World Trade 

be to insist on a degree of governmental intervention and 
intergovernmental cooperation far beyond anything con- 
templated in most countries today. 

Certain of the postwar international institutions, notably 
the Food and Agriculture Organization and the Bank, 
look, it is true, in the direction of a planned expansion of 
consumption and production. Others, including the Fund and 
the proposed International Trade Organization, may, by 
reducing barriers to international trade, act to free markets for 
raw materials. These measures, however, even under con- 
dition of economic prosperity, will probably not be enough to 
prevent the continued overemployment of resources in raw 
material production. It is possible that in time national 
policy directed toward fiscal control and international co- 
operation directed toward the coordination of domestic em- 
ployment programs may together provide machinery for ad- 
justing raw material consumption to production without re- 
course to restriction. It seems certain, however, that the time 
for this kind of mechanism, which would substitute expansion 
for contraction, has not yet arrived. 

Agricultural raw materials will continue to be produced in 
surplus because neither the mechanism of competitive ad- 
justment nor that of controlled expenditure is available to cor- 
rect the imbalance. This long-run tendency to overproduction 
of basic agricultural products has been aggravated by wartime 
expansion and, for certain commodities, by the development 
of synthetic substitutes. In the case of minerals, war-induced 
surplus stocks are impinging on a war-expanded capacity and 
on prospective high yields from scrap. It is fruitless at this 
point to look to the competitive market for the removal of 
these surpluses, and it is premature to expect their removal by 
a compensatory expansion of output elsewhere in the economy. 
Nations will have to devise their own programs for disposing 
of surplus stocks and dealing with overexpanded production 

sure that surplus resources will be free to move when expansion elsewhere makes 
such a movement possible. 

• 202 • 

Buffer Stocks and Quota Schemes 

and capacity. Unless some sort of international coordination 
of these programs is effected, there will be an attempt 
wherever possible to shift the burden of surplus disposal on 
to other shoulders. A return to the beggar-my-neighbor 
policies of the 1930's can scarcely be avoided except by a con- 
siderable measure of international cooperation. 

To point out that neither market adjustment nor planned 
industrial expansion can be expected to take care of existing 
or prospective raw material surpluses does not mean, of course, 
that public policy should not encourage every impetus to eco- 
nomic expansion. In certain areas, the removal of barriers to 
private trade will provide the stimulus; in others, publicly 
assisted industrialization programs may lead the way. Com- 
modity programs especially should be designed to facilitate the 
movement of resources out of overexpanded industries as 
quickly as expanded employment and investment opportuni- 
ties elsewhere make such a shift possible. What cannot be 
overlooked, however, is that war-induced raw material sur- 
pluses endanger many industries in which resources have been 
underutilized for years. Unless the rate of postwar expansion 
elsewhere in thb economy is extraordinarily rapid, no relief 
for these industries is in sight. 


A word needs to be said here about a preliminary and 
preparatory stage of international commodity cooperation 
that is assuming current importance under the innocuous 
title of international study groups. These groups have already 
been established for cotton and rubber and will be established 
for petroleum if the present agreement, now pending, is 
ratified. It seems probable, moreover, that others will be set 
up as the need for them arises. 

Cotton, Rubber and Petroleum 

The purpose of the cotton study group is to prepare an 
international commodity agreement. At the fourth meeting of 

• 203 • 

Controlling World Trade 

the International Cotton Advisory Committee in Washington 
in April, 1945, a study group representing six countries — four 
of the principal producers of cotton and two of the principal 
consumers — was established to prepare, within three months 
of its first meeting, a report "to include definite proposals for 
international collaboration.^" The report, when completed, 
is to be submitted to the International Cotton Advisory Com- 
mittee, representing ten cotton-producing countries, for such 
action "as may be deemed appropriate." From the nature of 
the instructions given the study group, some sort of quota 
scheme for cotton may be anticipated. 

There is no denying, however, that very real problems con- 
front the cotton study group. During the 1930's world cotton 
production expanded, notably in Brazil, at the expense of 
American exports. The United States has now, in efi'ect, given 
notice that not only is it unwilling to retire from the export 
market but that it expects to regain at least a part of that share 
of world exports previously lost through its domestic cotton 
policy. The weapon behind these intentions is an export sub- 
sidy that, within the discretion of the Commodity Credit Cor- 
poration, may attain any magnitude necessary* to move cotton 
in export channels.^ In the meantime, prewar average annual 

1 Resolution of the Fourth Meeting of the International Cotton Advisory 
Committee, Apr. 2-14, 1945, at Washington, D.C. 

In preparing its report the Study Group is directed to keep in mind the follow- 
ing considerations: 

(1) that effective international management of the cotton surplus would re- 
quire the collaboration of the governments of countries substantially dependent 
upon imports as well as of producing and exporting countries; (2) that an effec- 
tive international arrangement looking toward a reduction in excess supplies 
would require the regulation of one or more of the following — exports, export 
prices and production; (3) that the formulation of a plan for international action 
would take fully into account ways and means of expanding the consumption of 

2 The Surplus Property Act of 1 944 provides that 

. . . the Commodity Credit Corporation may dispose of or cause to be disposed of 
for cash or its equivalent in goods— or for adequately secured credit — for export 
only, and at competitive world prices, any farm commodity or product . . . 

• 204 . 

Bufer Stocks and Quota Schemes 

world exports of around 13 million bales have shrunk to an 
estimated prospective export of 8 or 9 million bales with no 
certainty that mill capacity, shifted to rayon production during 
the war, will return to cotton. Meanwhile, roughly 20 million 
bales over and above normal carry-over are immediately 
available for export. Yet cotton-exporting countries are un- 
willing to accept any drastic decline in present export prices. 

If excessive cotton stocks are to be reduced to manageable 
proportions by sales in a world market that shows signs of be- 
ing permanently contracted, then quotas for new cotton al- 
located to the principal exporting countries will have to be 
kept small for a number of years. But in order to restrict ex- 
ports without piling up a continual increase in the carry-over, 
it will be necessary to impose controls on production as well. 
How seriously this will affect cotton producers in the various 
countries that participate in an agreement will depend in part 
on the bargaining strength of the respective countries. 

In a cotton agreement, as in any international commodity 
negotiation, the bargaining position of the prospective partici- 
pants is very uneven. Surplus stocks and excess production 
exist mainly in short- and medium-staple lengths, that is, in 
American upland cotton and directly competing grades. At 
prewar price differentials, long-staple cottons were not in any 
great surplus, but since, within limits, staple lengths are inter- 
changeable a break in price differentials could bring about a 

Cotton-producing countries are unequally dependent on 
exports and have very different capacities for financing sur- 
pluses and for disposing of them. Cotton-producing costs also 
show great variation between countries. The United States' 
need for a world cotton agreement is more pressing, probably, 
than that of any other country. For not only are our surplus 
stocks large but they are of grades and lengths in which there 
is a large world surplus; our average costs — at the farm in- 
come levels we are willing to tolerate — are high, and our 
customary reliance on export for the disposal of cotton is 

• 205 . 

Controlling World Trade 

great. These circumstances render our negotiating position 
weak, were it not for the financial strength that permits us to 
sell cotton abroad indefinitely at a loss. This financial strength, 
placed behind the mechanism of export subsidies, has been 
sufficient to persuade other cotton-producing countries that 
an international agreement is inevitable. It will no doubt 
be a potent bargaining weapon in quota negotiations. 

It should be clear by now that a study group is not ex- 
clusively concerned with such subjects as the statistics of world 
production, consumption and stocks. Also included in the 
curriculum are the possibilities for unilateral action by various 
countries in the absence of agreement. In fact a study of the 
alternatives is the subject most likely to lead to a conviction 
that only a cooperative solution is possible for seemingly in- 
soluble problems. 

Since 1944 the United States has also participated, along 
with Great Britain and the Netherlands East Indies, in the 
International Rubber Advisory Committee. This group has 
no restrictive purposes; its functions are limited to a study of 
world rubber problems and to the working out, on a multi- 
lateral basis, of possible solutions. The American representa- 
tives on the committee are assisted by a Rubber Advisory 
Panel representing both producing and processing industries. 
At a minimum, this committee is likely to impress upon the 
participating countries the probable consequences of pro- 
posed national rubber policies on the international rubber 
trade. In formulating its postwar rubber policy the United 
States in particular should take into account all possible 
repercussions and the interests it may afi'ect. Beyond this 
minimum, however, the International Rubber Advisory Com- 
mittee will probably perform a more positive function looking 
to an international solution of world rubber problems. 

Should the proposed bilateral petroleum agreement, now 
under discussion by representatives of the United States and 
Great Britain, be ratified by both countries, it would call for 
the formation of a third study group, under title of the Inter- 

• 206 • 

Buffer Stocks and Quota Schemes 

national Petroleum Commission. The Commission, which is 
intended to advise the participating governments, will pre- 
sumably be expanded in the future to include the representa- 
tives of other oil-producing and consuming countries. Re- 
flection on the history of international oil controversy, and on 
the postwar foreign-trade and investment problems facing this 
industry, leads one to conclude that a petroleum commission, 
even though purely advisory, may be a very important inter- 
national mechanism for our time. 

Foreign expansion of the American petroleum industry 
has in the past involved this government in a number of 
sticky international negotiations: the controversy over the 
distribution of petroleum rights in Iraq in the early 1920's 
the dispute between the United States and the Netherlands 
over exploration rights and concessions in the Netherlands 
East Indies, the securing of concessions in the Persian Gulf 
area, the Mexican and Bolivian expropriations, and the con- 
troversy over the Barco concessions in Colombia, to mention 
but a few.^ Dwindling domestic oil reserves high-light the 
role of American oil interests, the possibilities for exploration 
in foreign countries and, more immediately, the foreign 
policy of the United States on oil. Outside this country and 
Russia, the principal oil reserves of the world are found in 
relatively undeveloped areas where more than one of the 
great powers is active. 

Participation in an international oil agreement should not, 
of course, be expected to determine or define the foreign oil 
policy of the United States, any more than participation in a 
United Nations organization could be expected to determine 
our foreign policy with respect to a particular country. An 
international committee is a piece of machinery that may or 
may not be used to further the interests and purposes of the 
participating governments. What can be expected, however, 
is that in an area as highly sensitized as oil, intergovernmental 

1 Cf. John A. Loftus, "Petroleum in International Relations," The Department 
of State Bulletin, Vol. XIII, No. 319 (Aug. 5, 1945). 

• 207 . 

Controlling World Trade 

discussion will precede any unilateral action. An Inter- 
national Petroleum Commission would appear to be the 
proper forum for much of this discussion, and its continuance 
as a permanent body may well smooth the way to a multi- 
lateral determination of oil policy. 

The petroleum industry is not confronted with a persistent 
surplus of the kind that plagues so many raw material in- 
dustries. Therefore an international agreement need not 
look toward an over-all limitation of output and the imposi- 
tion of export quotas. The principal issues facing the United 
States and other oil-producing countries revolve around 
access to oil resources, access to markets and the protection 
of foreign investments. The United States has, besides, a 
particular interest in the development of oil production in 
other areas to supplement our own diminishing reserves. An 
international oil agreement might, in the course of time, be- 
come an instrument for the regulation of production and 
marketing methods. Short of that, however, there are a 
number of areas of conflict on which an accord might be 
reached by an international organization representing the 
principal oil-producing and consuming countries of the 

The study group for rubber and the proposed Petroleum 
Commission have not, like the cotton group, been assigned 
the definite task of formulating an international commodity 
agreement of the familiar restrictive type. The situations 
that face these industries are not so easy to diagnose, and such 
remedies as may lie in international action are fraught with 
more hazardous possibilities than have challenged the 
negotiators of earlier international commodity agreements. 
The study group may provide a preliminary step to multi- 
lateral action, or it may merely advise in the formulation of 
national policies that take into account some of the extra- 
national interests involved. Among the commodities right- 
fully requiring concerted study, nitrogen deserves special 

• 208 • 

Buffer Stocks and Qiiota Schemes 

The Case of Nitrates 

As we noted in Chap. 11, Europe's excess synthetic ca- 
pacity had led, before the war, to the formation of a tight nitro- 
gen cartel that held certain facilities out of production and 
divided world markets with the Chilean Sales Corporation, 
almost the sole exporter of natural nitrates. During the war, 
synthetic capacity was greatly increased both in Allied ter- 
ritory and within the German zone of occupation. Euro- 
pean nitrogen facilities are now mainly idle for lack of coal, 
and the European shortage of nitrates is acute. This shortage 
may last, as we have said, well into 1946. As soon, however, 
as deferred demand has been satisfied, European synthetic- 
nitrogen capacity will come to be in very great surplus. 

Before the war about 50 per cent of Chilean nitrate exports 
came to the United States, and most of the remainder went, 
apparently by cartel agreement, to areas other than Europe. 
The extension of the low-cost Guggenheim process to practi- 
cally the Vv^hole of Chilean output will permit Chilean exports to 
sell at a still lower price, but even then natural nitrates can 
barely compete with the synthetic product in the American or 
European markets. For years the Chilean government has 
attempted, without success, to persuade other countries to 
refrain from constructing or developing synthetic capacity. 
At the Rio Conference in 1942 the United States agreed to 
avoid "in so far as possible the expansion of production of 
substitute or synthetic commodities which is economically 
artificial," except for the purpose of national defense. Since 
the synthetic product is not "economically artificial," but fully 
competitive with the natural product, this agreement con- 
stitutes no real check on synthetic production. 

During the war privately owned nitrogen capacity (in the 
form of anhydrous ammonia plants) increased in the United 
States from slightly over 400,000 to about 760,000 tons. War- 
constructed ordnance plants have an additional capacity of 
nearly 600,000 tons. Including all by-product production, the 

• 209 • 

Controlling World Trade 

United States has a present capacity of between 1,300,000 and 
1,400,000 tons of nitrogen per annum. Our prewar consump- 
tion in good years averaged around 700,000 tons; in 1941, con- 
sumption rose to 781,000 tons, of which 70,000 went into ex- 
plosives. United States fertiUzer nitrogen consumption, which 
had averaged 410,000 short tons in the five years 1937-1941, 
mounted to 631,000 tons in 1943. Under moderately favorable 
conditions the Department of Agriculture estimates postwar 
consumption at 750,000 tons. 

It is against this background that former Secretary of 
Agriculture Wickard recommended to Congress the con- 
version of 

. . . government plants with a rated capacity of 300,000 tons for 
the production of nitrogen fertilizers and ammonia derivatives as 
soon as war conditions will permit. These plants should be sold or 
leased to private industry, including farmer cooperatives, under ar- 
rangements which the Department of Agriculture finds will insure 
the use of the plants for the benefit of farmers in the public interest. 
Otherwise, the plants should be operated as a public enterprise.^ 

If this course were followed, the United States, on the basis 
of the above estimates, would be independent of nitrogen im- 
ports under favorable economic conditions and under less fa- 
vorable conditions might have a surplus for export. It is 
clearly our prerogative to safeguard our own nitrogen position 
without consulting other countries, but by so doing we shall 
also clearly affect the interests of other countries. Further- 
more, certain of these interests and the action taken by other 
countries to protect them will concern us. Among other 
aspects of the world nitrogen situation, we have reason to be 
interested in the degree of international competition in the in- 
dustry, possible programs for the scaling down of excess ca- 
pacity by intergovernmental action, and the effect on Chile of 
the probable loss of her principal markets. 

1 Testimony on H.R. 5125, House of Representatives Committee on Expen- 
ditures in the Executive Departments, Aug. 9, 1944. Cf. Also U.S. Depart- 
ment of Agriculture, A National Policy for Fertilizers and Liming Materials, Wash- 
ing, D.G., February, 1945. 

• 210 • 

Bufer Stocks and Quota Schemes 

Two companies, du Pont and Allied Chemicals, produce 
about 90 per cent of the private output of anhydrous ammonia 
in the United States and during the war operated about 50 
per cent of government-owned capacity. Establishment of 
effective competition must therefore be achieved through the 
transfer of government plants to independent producers. This 
will not be easy, since the plants to be disposed of are large 
and costly, and the competitive power of the two dominant 
producers is great. The disposition of United States govern- 
ment plants may ultimately affect the state of international 
competition, since the two leading private producers have 
cartel connections, du Pont through its patents and processes 
agreements with Imperial Chemicals, and Allied Chemicals 
through the substantial bloc of its stock held by Solvay, the 
Belgian member of the prewar nitrogen cartel. 

If the cartel policy outlined in Part I of this report were 
achieved by international agreement, and if government 
nitrogen plants were made a means for reactivating domestic 
competition, intergovernmental consultation to this end would 
not be needed. If these objectives^ — international and national 
— are not achieved, then the dearth of international competi- 
tion in nitrogen may well be a proper subject for an exchange 
of views among governments. 

It was suggested in Part I that a rational scaling-down of 
excess nitrogen capacity by intergovernmental agreement 
might forestall pressure for cartelization. Since any such pro- 
gram would hinge on what was done with government-owned 
nitrogen capacity in the United States, this government's 
participation is essential to any full discussion of the reduction 
of excess capacity. 

Finally, the United States has both a security and an eco- 
nomic interest in the soundness and solvency of the Chilean 
as well as of other American economies. It seems quite 
possible that Chile may lose a substantial part of her nitrates 
market and along with it an important source of foreign 
exchange and government revenue. In that case it might 

• 211 • 

Controlling World Trade 

be to our interest to assist Chile to develop alternative 
sources of employment, of foreign exchange and government 

There are, no doubt, other aspects of the world nitrogen 
situation that would repay intergovernmental study and con- 
sultation. Among them might be considered, perhaps in co- 
operation with the Food and Agriculture Organization, ways 
of increasing the use of nitrate fertilizers. Nitrogen has been 
selected for particular comment, but there are other raw ma- 
terials of which war-induced surplus stocks and increased 
productive capacity have created problems that demand 
attention. Whether an international commodity policy is re- 
quired, or merely intergovernmental consultation on the 
implications of national policies, the international study group 
may prove to be a useful means for arriving at solutions com- 
patible with satisfactory trade relations. 


The use of buffer stocks as a device for offsetting price 
fluctuations in a particular commodity has a history that is 
shortly told and not very illuminating. 

The tin agreement is the only one to date that has provided 
for an internationally held buffer stock, and its influence on 

1 The following discussion, because of space limitations, has had to neglect a 
number of the very real operating difficulties confronting buffer-stock manage- 
ment that can be effectively presented only by an examination of the character- 
istics of particular commodity markets. We speak of commodities in this section 
as though they were homogeneous. A moment's reflection on the number of 
grades and staple lengths of cotton in the United States and in other cotton-pro- 
ducing countries reveals how much more complicated the management of a 
buffer stock of cotton would be likely to be than if cotton were really a homo- 
geneous product. Brazilian coffees have been the only types in substantial sur- 
plus. Yet if a buffer stock were limited to Brazilian coffees the effect on the price 
of other types and blends would seriously complicate the management of the 
problem. The different locations of surplus stocks in relation to markets, the 
presence or absence of storage facilities, the inadequacy in certain areas of 
statistical data and of crop forecasting techniques, and the problems involved in 
sharing the financial cost add up to a formidable set of practical difficulties con- 
fronting any international buffer-stock scheme. 

• 212 • 

Buffer Stocks and Qiiota Schemes 

price movements has been all but invisible. The stock was ex- 
tremely small in relation to variations in the rate of tin con- 
sumption; the fact of its existence led to a reduction of current 
holdings on the part of both producers and users; and the Tin 
Committee appears to have considered a buffer stock a 
partial substitute for a conservative management of quotas/ 
Although this single instance is hardly conclusive proof that 
buffer stocks cannot assure price stabilization, it has led the 
most recent historian of the tin agreement to the somewhat 
pessimistic conclusion that 

... as long as both functions, price boosting and price stabilizing, 
are entrusted to the same institution and the same controllers, who 
are representatives of producer's interests, so long even the best of 
machinery and institutional devices will not guarantee success in 
preventing undue price fluctuations. ^ 

Both the Draft Wheat Convention and the sugar agreement 
provide that the participating countries of export shall main- 
tain stocks sufficient to meet any foreseeable harvest variation, 
but neither establishes an internationally held buffer stock de- 
signed to protect prices against unforeseen variations in de- 
mand. In fact, except for tin, practically the only experience 
to date with international buffer stocks, whether held by pri- 
vate or governmental agreement, has been the attempt to pool 
surplus stocks for purposes of orderly clearance. The Chad- 
bourne plan provided for the gradual disposal of sugar stocks 
over a period of five years, with a simultaneous restriction on 
exports and production. Since the agreement was reached in 
the midst of extreme depression, in 1931, the end of the five- 
year period found sugar prices lower than they had been at 
the beginning. The first tin pool, organized in 1921, was 
similarly intended to arrest a price decline by holding supplies 
off the market. After the First World War, surplus copper 

1 Cf. K. E. Knorr, Tin Under Control (Commodity Policy Study, No. 5) (Food 
Research Institute), Stanford University Press, Stanford University, Calif., 1945, 
pp. 207-213. 

2 Ibid., p. 212. 

• 213 • 

Controlling World Trade 

stocks were pooled by international agreement among copper- 
producing interests. One of the most interesting and im- 
portant surplus-stocks-disposal plans is embodied in the cur- 
rent agreement between the United Kingdom and the 
dominions of Australia, South Africa and New Zealand for 
the marketing over a period of 1 3 years of more than 3 billion 
pounds of wool accumulated by the United Kingdom during 
the war/ 

The national experience with storage plans has been more 
extensive, but it does not throw much light on whether, and to 
what extent, buffer-stock operations may be expected to 
cushion price variations. A number of governments have 
undertaken the purchase and storage of wheat in order to 
support prices by holding surplus stocks until prices rose. For 
various reasons, but mainly because of an inability to estimate 
the magnitude and duration of the price decline and to resist 
the pressure of interested producers, administrators of storage 
plans have found the disposition of stocky extremely difficult. 
If buffer stocks are to counteract demand fluctuations, they 
must permit of a two-way movement. Without, however, the 
aid of war or other catastrophe to absorb accumulated stocks, 
national storage plans have tended to store much and to dis- 
burse little. 

There is, however, reason to believe that attempts to even 
out demand fluctuations by purchase for and sale from stocks 
may prove more successful in the future. To begin with, it is 
unlikely that we shall soon see a recurrence of the decline in 
consumption and prices comparable to that of the 1930's. 
Moreover, experience with buffer-stock and storage operations 
has demonstrated the size of stocks that must be held if 
fluctuations in demand are to be offset. The 8,000 tons of the 
second tin pool and the 15,000 tons of the third tin pool 
were quite inadequate to safeguard tin prices. A buffer stock 
of 50,000 tons, however, about one-third of annual consump- 
tion, would safely cushion demand changes of prewar magni- 

iQf. Board gJ Trade Journal, Sept. 8, 1945, pp. 421-423. 

• 214 • 

Buffer Stocks and Quota Schemes 

tude. For commodities that undergo great variations in 
supply, such as coffee, or in demand, such as most metals, 
buffer stocks of a size approaching average annual consump- 
tion may be necessary to an effective stabilization of prices. 

Whatever the prospects for buffer-stock operations in 
general, it is obvious that the holding of surplus stocks for 
orderly disposal, which is one type of buffer, is going to be 
necessary for a number of commodities. The British Empire 
scheme for the marketing of wool stocks has already been an- 
nounced and other plans will doubtless follow. If these very 
large war-induced stocks are to be disposed of without de- 
moralizing the market, the policies to be followed will have to 
be publicly announced and strictly adhered to. Apprehension 
regarding the policy or changes in policy of the disposal 
authority would tend to produce the speculative price fluctua- 
tions that the authority was set up to prevent. 

The current experience of the U.S. Commodity Credit Cor- 
poration in disposing of cotton stocks at announced prices is 
instructive. Since Nov. 15, 1944, the CCC has been selling 
cotton for export at 4 cents below the average domestic price 
on ten spot markets. So long as foreign cotton .of comparable 
grades is offered for export in quantities insufficient to meet 
the demand at American prices, the world market price tends 
toward the CCC figure. The price will not move above that 
level, since the CCC is ready to sell any quantity at the an- 
nounced price. The supplies of United States cotton are for all 
practical purposes unlimited, so that a lowering of the price 
at which the United States is prepared to sell will lower export 
prices everywhere. At any price lower than that required to 
clear the market without resort to United States cotton, the 
announced price of the CCC becomes the world market price. 

If the object of a central authority is to cause as little market 
dislocation as possible in disposing of surplus stocks, the best 
procedure would seem to be to announce at regular intervals 
a price at which unlimited quantities vviil be sold. A fixed 
price would prove less disturbing to the market than either the 

• 215 • 

Controlling World Trade 

I'egular sale of fixed quantities or the sale at irregular inter- 
vals of quantities determined by the disposal authority. The 
regular sale of fixed quantities would contribute nothing to 
price stability, and the irregular sale of undeterminate 
quantities — whenever the market is "right" — might introduce 
an unsettling speculative element. It is, of course, imperative 
that the authority be consistent and unswerving in its disposal 

If the commodity in surplus does not deteriorate in storage, 
the authority may keep the price in check merely by selling or 
withholding from sale. There is always a danger that the 
primary purpose, the disposal of surplus stocks, may be lost 
sight of if too great attention is paid to price stabilization, al- 
though good management may succeed in keeping prices 
stable while still disposing of stocks. In any case, if purchases 
are ruled out, there is little likelihood that stocks will increase. 

If, however, the stock cannot be stored indefinitely but must 
be turned over, it greatly complicates management's prob- 
lem. The quantity and timing of purchase as well as of sale 
are then at the discretion of the authority. Not only does the 
opportunity for influencing the market become much greater, 
but also the possibility of sacrificing surplus disposal to stabil- 
ization aims. Under these circumstances the surplus can be- 
come a full-fledged bufl'er stock and may be operated accord- 
ingly. How much discretion surplus disposal authorities should 
be permitted in the stabilizing of prices is a question that 
must be answered after a further examination of bufl'er-stock 
operations. In particular, we shall want to see whether such 
operations are practicable in the absence of export and pro- 
duction controls. 

A buff'er stock could be a useful adjunct to any quota scheme 
that eff*ectively controlled either the trend of output or the 
quantity of export supplies available. The bufl'er stock might 
help not only to stabilize prices but to avoid drastic changes in 
quotas. With output (or exports) planned, the buff'er stock's 
function would be to even out demand fluctuations and un- 

• 216 • 

Buffer Stocks and Quota Schemes 

predictable crop variations above or below the planned level. 

If the buffer-stock management stood ready to buy or sell 
at an announced price or within a narrow price range, random 
day-to-day price variations would be very slight. These varia- 
tions reflect the impact of a changing rate of use on inade- 
quate stocks or the speculative anticipation of changes in 
volume of supplies or in rate of consumption. The buffer 
stock of tin did nothing to eliminate these day-to-day fluctua- 
tions, because the Tin Committee did not stand continuously 
ready to sell at an announced price. The tin stock was 
accumulated and disbursed in order to check major price 
swings, although the quantities in reserve were always in- 
adequate for this purpose. Tin prices, therefore, were quite 
as volatile under control as they had been without it. 

A commodity stock large enough to have a counter- 
cyclical influence would be ample to minimize the effect of 
day-to-day demand variations or of speculative purchases or 
sales. The management, however, would need to be ready 
always to buy or sell at, or near, the level of day-to-day prices. 
Random price variations, while they serve no useful purpose, 
cannot be said to hamper very extensively the functioning of 
the economy, particularly if producers and users of the com- 
modity are served by an adequate futures market. Therefore, 
any contribution made by buffer-stock operations to the 
cushioning of day-to-day price changes would be of very 
minor importance. 

Purely seasonal fluctuations in raw m.aterial prices are so 
slight as to deserve no particular mention. For certain crops, 
however, harvest variations can be very great, and their effect 
on prices catastrophic. Coffee is probably the most extreme ex- 
ample among important agricultural commodities, and a 
whole succession of good or bad harvests is not unusual. 
The concentration of coffee raising in one geographical area, 
moreover, accentuates the effect on world supplies. For most 
of the other major agricultural commodities in international 
trade, production is more widely distributed and harvest 

• 217 • 

Controlling World Trade 

variations are not so great; annual world production of wheat 
or sugar, for example, is relatively much more stable. To 
counteract the influence on prices of uneven coffee crops 
would require a buffer stock of very large dimensions, perhaps 
the equivalent of one year's consumption. For most agri- 
cultural commodities, however, buffer-stock purchases or 
sales in much smaller quantities could compensate for harvest 

Raw material prices are most powerfully affected either by 
cyclical variations in consumption or by longer-run shifts in 
the level of costs or the structure of uses. For basic foodstuffs, 
even cyclical variations in consumption are small. For wheat, 
in fact, an ever-normal granary v/ould probably need to do no 
more than balance the normal range of harvest variation in 
order to perform the necessary price-stabilizing influence, but 
other agricultural commodities, particularly sugar, and fats 
and oils, which have industrial uses, show a greater cyclical 
variation in consumption. Irrespective of long-run structural 
change, however, the magnitude of price fluctuations in basic 
foodstuffs is due less to any sharp alteration in the rate of pro- 
duction or consumption than to a low price elasticity of 
demand by virtue of which relatively small changes in these 
rates will produce large changes in price. Since — except for 
coffee — production and consumption of most foodstuffs are 
relatively stable, buffer stocks of modest proportions could 
make a definite contribution to price stability. 

Agricultural commodities having important industrial uses, 
like rubber, cotton and wool, show a considerably greater 
cyclical variation in consumption; buffer stocks, to exercise a 
counter-cyclical price-stabilizing function, would therefore 
have to be proportionately larger. Even for these commodi- 
ties, however, a buffer stock accumulated on the downswing 
and disposed of on the upswing, and attaining at its maximum 
50 per cent of average annual world production or consump- 
tion, could exercise a considerable stabilizing influence. 

The raw materials that exhibit the greatest cyclical changes 

• 218 • 

Buffer Stocks and Quota Schemes 

in consumption are chiefly minerals and metals. Although 
prices are also variable, this instability is mitigated by monop- 
oly control of output and by the periodic entry and exit of a 
considerable volume of high-cost production. Price main- 
tenance in depression would involve the maintenance of a 
much higher than customary volume of output, and the 
magnitude of the accumulated stocks would be correspond- 
ingly large. Although the stabilization of minerals and metals 
production over the cycle would be of unquestionable advan- 
tage both to the economy of mineral extraction and to stability 
in the economy as a whole, its cost in financing and storage 
would be large indeed, and the benefits accrued might tend to 
be concentrated unduly in a few hands. 

There is a distinction, fundamental to public policy in the 
field of commodity agreements, between worker-owner indus- 
tries characteristic of agriculture, and the highly concentrated 
ownership and control fairly typical of mineral extraction and 
metal production. Since there exist, for minerals and metals, 
monopoly organizations capable, through price and wage con- 
trol, of siphoning ofi" a substantial part of the benefits of public 
action, bufi'er-stock operations financed by public funds can 
probably not be justified. 

Bufi"er-stock operations that distribute the benefits of stabi- 
lized prices widely and yet do not involve excessive storage or 
handling costs can contribute appreciably to a smoother func- 
tioning of the economy. The benefit though does not lie, as 
agricultural interests so frequently claim, in any direct influ- 
ence on the real income of the economy as a whole, since what 
producers gain in higher incomes consumers lose in higher 
prices. The benefit may lie in (1) averting restrictive pro- 
grams that might otherwise be introduced to mitigate price 
declines and (2) the advantages to ordered production and 
production planning that come from stable price expectations. 
To the author's knowledge, none of the extensive literature 
on "price flexibility" has ever demonstrated that cyclical 
fluctuations in raw material prices serve any useful purpose. 

• 219 • 

Controlling World Trade 

On the contrary, speculation on a further decline in prices on 
the downswing and on a further rise in prices on the upswing 
clearly augment the strength of deflationary and inflationary 

A price change properly reflects a fairly permanent change 
in consumers' preference or in costs of production. The fun- 
damental economic problem in bufl'er-stock operations is to 
diff'erentiate between these long-run price changes and those 
which would sooner or later be corrected by the opposite 
action of market forces, and to efl'ect this short-period price 
compensation sooner rather than later. The fundamental 
political problem is to devise an institutional framework that 
will safeguard buff'er-stock management from the pressure of 
interested groups. 

Both problems are in large part solved for buff'er-stock man- 
agement if the stock is set up within the framework of a work- 
able quota scheme. Management will then not have to 
concern itself with the efl'ect of buffer-stock price policy on the 
volume of production (or the supplies off'ered for export) since 
these will be subject to control. Essentially the job becomes 
one of minimizing fluctuations around a given level (or trend) 
of prices. Determination of the proper level is the responsi- 
bility of the control authority; if a selected level cannot, in the 
long run, be maintained, the need for quota changes is indi- 
cated. We are not now concerned with the question of 
whether production or export quotas take equal account of 
consumer and producer interests. The only point to be 
made here is that if the quotas are adequate to insure the 
consistent maintenance of a level or trend of prices, buff^er- 
stock operations can be limited to the control of price changes 
which the market would in time reverse. 

If the buff'er stock is of suflficient size, these price variations 
can be compensated without quota changes. One of the 
dangers, however, to efl^ective buffer-stock operations lies in the 
possibility that the control authority will attempt to counteract 
any variations by changes in the quota while holding the 

• 220 • 

Buffer Stocks and Quota Schemes 

stock to small dimensions. Not only do frequent changes in 
quotas adversely affect the economy of production and the 
stability of workers' incomes, but a quota change is of little use 
in protecting prices against short-run market variations. A 
change in quota must necessarily be effective for a consider- 
able period of time, and even then may overshoot the mark. 
In the history of tin control, for example, quota reductions so 
closely followed every downward shift in sales that any ensuing 
increase in demand shot prices up before an upward revision 
of the quota could make itself felt. There appears to be no 
reason, however, why an authority less interested than the Tin 
Control in the realization of maximum immediate profits 
could not successfully use buffer stocks to effect considerable 
stabilization of prices and quotas. 

A buffer stock operated outside the framework of a quota 
scheme, however, represents a much more complex problem. 
In this case not only is the management faced with difficult de- 
cisions as to the desired level or structure of prices (while lacking 
any control over supply responses to this level), but the pressure 
of producers for higher prices impinges directly on its purchase 
and selling operations instead of on adjustment of the quota. 

Should buffer-stock operations be undertaken for commodi- 
ties suffering from chronic overproduction, there is a strong 
probability that any price level calculated consistently to move 
current output either into consumption channels or into buffer- 
stock storage either would be too low to be politically tolerable 
or too high to prevent a persistent over accumulation of stocks. 
The argument against quota controls is so strong that there 
arises an understandable temptation to use storage schemes, 
even when the object is to raise a price level rather than to 
minimize fluctuations about a given level. A buffer stock 
does not interfere, as quotas do, with ordinary market trans- 
actions. Dealers are free to buy from and sell to whomever 
they like and in whatever quantities. Unlike quota schemes, a 
buffer stock does not tend to prevent production from moving 
from high-cost to low-cost sources; nor need buffer-stock 

• 221 • 

Controlling World Trade 

operations prevent the level of prices from being influenced by 
changes in consumers' tastes or in methods of production. If, 
however, a buffer stock is used to prop up a sagging price level, 
it will soon lose any capacity it might have to stabilize prices, 
even over the long run. Under conditions of chronic over- 
production, a buffer stock can function adequately only as an 
adjunct to a quota scheme. 

If buffer-stock operations (divorced from quota control) 
were limited to commodities not subject to chronic overpro- 
duction, it would first be necessary to maintain a proper price 
level and then make appropriate changes in it to meet funda- 
mental alterations in demand or supply conditions. If the 
aim of buffer-stock management were to hold price fluctua- 
tions within 10 per cent either way of a basic level, the stock 
would purchase when the price fell below that level and stand 
ready to make unlimited purchases at the 90 per cent limit. ^ 
If price rose above the basic level, the management would sell 
and stand ready to make unlimited sales whenever the price 
reached 110 per cent. Error in the choice of price level would 
presumably show up either in an accumulation of excess stock 
or in a deficiency large enough to prevent the management 
from performing its proper compensatory functions. A buffer 
stock of this sort could not be operated on a rule-of-thumb 
basis. Clearly, managerial discretion would have to be not 
only informed but unhampered. Such an operation, how- 
ever, should not require extraordinary competence, but to be 
fully successful it would require that the management be 
protected from the pressure of producers. 

1 It is not suggested that a limitation of price fluctuation to 10 per cent either 
way from a basic level or trend of prices is a proper buffer-stock objective for all 
commodities, or even for any particular one. A statement of objectives must take 
into account the suppply and demand characteristics of a group of interrelated 
commodities (such as the various grades and lengths of cotton) and of the struc- 
ture of markets for these commodities. Price fluctuations held within limits sub- 
stantially wider than plus or minus 10 per cent could still represent an approach 
to relative stability for many raw materials. It would probably be wise, in any 
case, for a buffer-stock management to start with modest objectives and feel its 
way gradually toward a more effective policy of price stabilization. 

• 222 • 

Buffer Stocks and Quota Schemes 

Neither the history of storage schemes nor reflection on the 
superior organization of producers' as against consumers' 
interests entitles us to much confidence on the latter score. 
Judging by past performance we should expect that the basic 
price level would be set too high, that any downward revision 
would be opposed, that the permissible limits to the size of the 
buffer stock would be continually expanded and that obstacles 
would be put in the way of liquidating accumulated holdings. 
These would appear to be the inevitable consequences of any 
buffer scheme in which storage costs are borne by groups out- 
side the industry, so that producers suffer no penalty for the 
accumulation of excessive stocks. If the malady affecting a 
particular commodity is not chronic overproduction but 
price instability, the industry itself can and should be made to 
bear the cost of any storage plan designed to lessen this insta- 
bility. Unless the cost burden can be assessed by a tax on 
output or by other means, buffering operations are in grave 
danger of foundering on the rock of excess accumulation of 

However, now that the war is over, it will not be a matter of 
deciding, with respect to certain commodities, whether to 
accumulate or not to accumulate a stock. The stock will be 
there, mainly in government hands, and the immediate task 
will be to dispose of it without demoralizing the market. Even 
if authorities are given a straight disposal problem, with no 
necessity to turn over stock through concurrent purchase and 
sale, price considerations are certain to influence the timing 
and volume of sales. Since producers will bear no part of the 
cost of holding stocks, they may be expected to press for an 
indefinite withholding from sale. In such circumstances, as 
we have already warned, the primary disposal objective can 
easily be obscured beneath the ostensibly secondary aim of 
price stabilization. Short of requiring the authority to dis- 
pose of a definite quantity of the commodity per annum, it 
would seem advisable to limit his discretion rather narrowly in 
order to isolate him as far as possible from producers' pressure. 

• 223 • 

Controlling World Trade 


The principal control device of an international commodity 
agreement is the import or export quota, which may or may 
not be accompanied by control of production in the participat- 
ing countries. If the agreement is designed to divide an 
import market among various exporters, quotas policed by 
the country of import are customarily used. Thus, Great 
Britain assigned beef quotas to its principal suppliers in the 
international beef agreement; the United States has enforced 
coffee import quotas under the international coffee agree- 
ment, and contributed the fixing of import quotas to the sugar 
agreement. So long as the consuming country is willing to 
enforce these quotas, no producing country can sell more 
than the amount agreed upon. As yet, however, no commod- 
ity agreement aimed at the limitation of total world exports 
has relied upon import quotas as the central control device/ 

When the commodity agreement has as its main purposes 
the maintenance of world prices and the sharing of world mar- 
kets, it is the exporting countries that customarily bear the 
responsibility for controlling supplies through the imposition 
of export quotas. If the exports of all participants are mar- 
keted through a single sales agency, there need be no question 
of preference in a given market for exports from a particular 
area. If, on the other hand, each exporting country has its 
own channels of distribution and normal markets, these will 
probably enter into any calculation of established quotas.^ 

1 The Draft Wheat Convention, however, provides that "the contracting 
government of each importing country shall not permit the importation into its 
territories of wheat or flour shipped from that exporting country [where quota 
has been filled] during the current quota year more than seven days after the 
date of the Chairman's declaration [that the quota has been filled.]" Article IV, 
Sec. 10. U.S. Department oj State Bulletin, Vol. VII, No. 158 (July 4, 1942), 
pp. 582-591. 

^ The Draft Wheat Convention provides "in principle that . . . wheat from 
each exporting country should continue to find its way into its normal market." 
Article IV, Sec. 1. Presumably, this means that exporting countries will be 
limited to their "normal markets" unless it is impossible to fill their quotas by 
exports to such markets. 

• 224 • 

Buffer Stocks and Quota Schemes 

Can Quota Schemes Work? 

Before we attempt to evaluate the desirability of quota con- 
trol as compared with other possible courses of action (or 
inaction), it will be necessary to raise some preliminary ques- 
tions : Can exports be controlled by quotas? Are export quotas 
enforceable by the participants to the agreement? Can control 
of exports be maintained without control of production? 

International restrictive agreements, both public and pri- 
vate, have shown a tendency, disconcerting to their protago- 
nists, to break down under stress. Although intergovern- 
mental agreements have exhibited greater durability than 
private cartel arrangements, and although progress has been 
made over the last decade in learning how to make these 
arrangements work, it is by no means clear that export con- 
trols can be applied to all the commodities for which such 
devices are advocated. 

A quota scheme relies first of all on an understanding among 
the participants that they will not depart from either the export 
limits or price level specified in the agreement. The partici- 
pants, however, inevitably have unequal interests in the agree- 
ment and its maintenance. Low-cost producers, reluctant 
to participate, may have been convinced only by the pressure 
of immediate market conditions. As conditions improve, 
these producers may come to feel that unrestricted competi- 
tion will assure them larger exports than have been assigned 
them under a quota system. An unexpectedly large harvest 
yield may often create pressure for an expansion of exports. 

The fact that an international commodity agreement must 
frequently be loosely drawn, in order to win the adherence of 
reluctant members, itself facilitates disunion. The 1933 
International Wheat Agreement, embracing 22 countries, 
broke down when Argentina, faced with an unexpectedly 
large harvest for which adequate storage was lacking, exceeded 
her quota.* However, in the case of the present Draft Wheat 

1 Cf. Joseph S. Davis, New International Wheat Agreements (Wheat Studies of the 
Food Research Institute) (Vol. XIX, No.2), Stanford University Press, Stan- 

. 225 • 

Controlling World Trade 

Convention, the continued threat of an export subsidy by at 
least one of the members may enforce adherence to the agree- 
ment if it finally goes into effect. 

Even if the principal exporters of the world were to unite 
on a quota plan they could all support, exports from sources 
outside the agreement could, in the course of time, wreck the 
project. The nefarious operations of "outsiders" receive 
extended attention in cartel literature, and they may be 
expected to constitute just as much of a threat to any restric- 
tive intergovernmental agreement. Early control schemes 
in sugar and rubber were wrecked by outside competition; 
Brazil has seen its foreign market for coffee, and the United 
States its foreign market for cotton, cut by the competion of 
other suppliers; and even the Tea Control, which perhaps of 
all the international commodity authorities has pursued the 
most moderate price policy, has not been able to prevent 
diversion of a share of the world market to the unregulated 
production of China, Japan, Formosa and Indo-China..^ 

Previous experience has demonstrated the absolute necessity 
for including all principal sources of supply and for avoiding 
any postwar agreements that might be subjected to extensive 
outside competition. Yet the difficulties of bringing all 
exporting countries into an agreement cannot be overlooked. 

The tin agreement achieved its exceedingly strong position 
only by generous concessions to unwilling participants at the 
expense of the original members, and it clearly recognizes the 
danger from outside competitors in a provision permitting any 
signatory to withdraw from the agreement if and when the 
production of tin in territories outside the scheme exceeds 1 5 

ford University, Calif., 1942, p. 26. The Argentine representatives "plausibly 
argued that the North American producers had already failed to fulfill the badly- 
worded commitments to contract their wheat acreage for 1934." 

1 V. D. Wickizer, Tea Under International Regulation (Commodity Policy Study, 
No. 4) (Food Research Institute), Stanford University Press, Stanford Univer- 
sity, Calif., 1944. In this case {cf. Chap. IX) the inferior production methods of 
outsiders has made their competition less dangerous. 

• 226 . 

Byffer Stocks and Quota Schemes 

per cent of total world production/ It is possible that the 
proposed International Trade Organization, forming a part of 
the United Nations organization, may succeed in consummat- 
ing commodity agreements that will include all significant 
exporters and importers, but in all commodity agreements now 
existing and under negotiation the effective control of exports 
is jeopardized constantly by the competition of nonparticipat- 
ing producers.^ 

Another kind of outside competition can be expected with 
the emergence of synthetic substitutes and, for most metals and 
some agriculturally produced industrial materials, with the 
reclamation of used material and of scrap. The proposed cot- 
ton agreement, even though it should include all the important 
raw-cotton-producing countries, may still founder on the shoal 
of competition from synthetic fibers. In most metals, scrap 
collection is not only highly "competitive but readily responsive 
to changes in price. These two factors will seriously affect any 
price policy that might be set up by an authority controlling 
supplies of the virgin metal. 

Unless it makes provision for existing and potential outside 
competition, an export control scheme is bound to break down 
as so m^any have in the past; and if it does make such provision, 
it may severely circumscribe the limits within which the con* 
trol authority can operate. Commodities entering world 
trade show an enormous disparity in their adaptability to 
export control. At one extreme is tin. Here a number of 
special conditions all favor effective control: the limitation of 

1 CJ. Tin Producer's Association, International Tin Control and Buffer Stocks y 
p. 17. 

2 The Draft Wheat Convention contains, in veiled language, a threat of con- 
certed action against recalcitrant outsiders. Cf. Article IV, 

The contracting governments recognize that international trade in wheat 
should be distributed on a fair and equitable basis among all countries which ex- 
port wheat and they agree that the effective operation of the Agreement should 
not be impaired by abnormal exports from countries that have not acceded to it. 
Accordingly, the contracting governments shall cooperate in taking, on the ad- 
vice of the Council, such practicable measures as may be necessary to attain this 

• 227 • 

Controlling World Trade 

known reserves and their location in a relatively few areas, 
the high degree of concentration in tin mining, the financial 
integration of smelting and mining interests, the relative 
consumer indifference to high prices, the meager competition of 
reclaimed tin and the lack of close substitutes. As the Lon- 
don Economist puts it, "If there was ever a branch of production 
offering exceptional opportunity for intelligent planning it is 
the tin industry."^ 

At the other extreme are some of the basic agricultural com- 
modities, for which international control is planned or pend- 
ing. In those, cultivation is widely distributed geographically 
and easily expanded, production within a country is difficult 
to control, consumers and importing countries take an active 
interest in the price of the commodity, and synthetic substitutes 
compete with the natural product. A wheat agreement that 
only exercises control over the exports of the four principal 
exporting countries — Australia, Canada, Argentina and the 
United States — will be constantly endangered by the competi- 
tion of outside producers. Agreements covering sugar, coffee, 
cotton and rubber will each be confronted by great, though 
different, obstacles in bringing world exports under control 
tight enough to accomplish their specific purposes. 

Assuming for the moment that complete control over exports 
is possible, can it be maintained without some control over 
production? If production is not controlled in one or more 
of the countries party to the agreement, there is always the 
possibility that accumulating surplus stocks will furnish an 
incentive to break away from the agreement. The obligation 
to limit exports might, of course, be fulfilled in other ways, as, 
for example, through destruction of stocks, through low-price 
domestic consumption, by two-price plans, by the expansion of 
local processing facilities or by various alternative methods, 
but sudden increases in consumption are not easy to bring 
about, and the destruction of stocks is expensive. 

1 "The Tin Control," London Economist, Mar. 23, 1935. Cited in Knorr, op. cit.^ 
p. 99. 

• 228 • 

Bufer Stocks and Quota Schemes 

Obviously, then, an export quota scheme without adequate 
production control is likely to break down under stress. Com- 
modities, however, are as dissimilar in their adaptability to 
production controls as countries in their willingness and capac- 
ity to impose them. The first tin agreement obligated the 
participating governments to limit production ''so that it 
shall correspond as closely as possible throughout the year to 
their export quotas,"^ and tin production, with a two- or three- 
month lag, seems to have closely followed changes in export 
quotas. Under this scheme all the tin producers in the mem- 
ber countries were assigned a standard tonnage. Over-all 
control of production within the limits of the agreement was, 
however, definitely facilitated by the relatively small number 
of tin producers, the very slight change from year to year in 
their identity and the possibility of close control of output 
within each producing unit. 

These conditions differ markedly from those character- 
izing the production of most agricultural commodities. Here 
the chief control instruments are modification of permitted 
acreage, limitations on new planting, various type of sub- 
sidy payment and, as a last resort, the ploughing under of 
unharvested, or the destruction of harvested, crops. None 
of these can be described as either delicate or sensitive. 

A limitation on the planting of coffee or rubber trees or tea 
bushes will have an effect only after the lapse of years. Cur- 
tailment of acreage has a way, as experience in the United 
States has shown, of increasing the yield per acre. The use- 
fulness of subsidies depends on what is subsidized and how; 
if the particular crop subsidy is a part of a larger system of 
agricultural control, the possibilities are infinite. Adjustment 
of incentives within such a system can certainly encourage 
a reduction in output of certain crops and increases in others, 

1 Knorr, op. cit., p. 110. Article 18 of the third tin agreement permits pro- 
duction for stock up to 25 per cent of the standard tonnage, which permitted a 
substantial divergence between production and export. Production remained, 
however, definitely under control. 

• 229 . 

Controlling World Trade 

but these directives, subject to the decision of hundreds of 
thousands of farmers and to natural variations in crop condi- 
tions, do not constitute a very sensitive instrument for the con- 
trol of output. 

At best, these devices to limit agricultural production can 
check an expansion of average annual yields or bring about 
their slow contraction. If, however, an adequate storage plan 
can be set up as a buffer against unforeseen variations in 
demand and supply, nothing more may be necessary to supple- 
ment an export quota scheme. But this much is necessary. 
Without some control over output, export quotas are in danger 
of collapsing under the pressure of continually expanding 

The rubber agreement appears to have come closer to com- 
plete production control than any other international under- 
taking in an agricultural commodity. But here again, as in 
the case of tin, there were factors facilitating control. About 
half of all rubber production was concentrated in large-scale 
plantations, and most of the remainder was produced by 
natives who could be — and were — required to conform to the 
over-all decisions. In the case of tea, an unusually stable rate 
both of consumption and production makes possible a satis- 
factory market adjustment with no need for controls beyond a 
limitation of new planting and an alteration in the size of 
stocks held off the export market.^ Production controls for 
wheat and cotton, however, are much less easily imposed. 
The Draft Wheat Agreement, in addition to establishing 
export quotas, minimum and maximum export prices, and 
specific limitations on stocks held in the participating coun- 
tries, commits the member countries to the adoption of "suit- 
able measures to insure that the production of wheat in their 
territories does not exceed the quantity needed for domestic 
requirements and the basic export quotas and maximum 

1 As Wickizer points out {pp. cit.^ Chap. IX) the tea industry was not over- 
expanded and most of the cultivation within the control of the scheme is on 
large plantations under scientific methods, which makes for stability of yield. 

• 230 • 

Buffer Stocks and Quota Schemes 

reserve stocks."^ However, neither Canada nor the United 
States, the two principal exporting countries that have experi- 
mented most extensively with control measures, can be said to 
have had much success in restricting wheat output. It 
remains to be seen whether an international agreement to 
limit exports and regulate stocks can provide a more effective 
incentive for production control than was the expanding sur- 
plus of the war and prewar years. 

Acreage control in the United States has been most suc- 
cessfully applied to cotton. Yet little has been done, even 
under the exceptionally favorable conditions created by the 
war, to move resources out of cotton culture. The principal 
cotton-exporting countries outside the United States — Brazil, 
India and Egypt — have had little experience with production 
control and manifest no desire to attempt it. It is therefore 
highly doubtful whether the proposed international cotton 
agreement can satisfactorily limit cotton production, even 
though the persistence of surplus stocks overhanging the mar- 
ket is certain to jeopardize the continuance of effective export 

Enough has been said to justify a legitimate doubt as to the 
workability, under certain circumstances, of international 
quota schemes. This was the question to be answered in this 
section. The workability of international commodity con- 
trols is sufficiently doubtful to warrant extreme skepticism 
regarding the hopes of international planners that a compre- 
hensive commodity organization that will adjust raw material 
supplies to prospective demand is in the offing. 

Are Quota Schemes Desirable? 

The argument against quota controls is so strong that only 
the lack of practicable alternatives would seem to justify their 
use. Briefly, the arguments against are that quota control will 
freeze exports in existing channels and production in existing 

1 Draft Wheat Agreement, Article II. 

• 231 . 

Controlling World Trade 

locations, that controls are necessarily producer-dominated 
and yield prices satisfactory only to producers' interests, 
and that the very existence of controls, when effective, is 
enough to prevent or postpone any positive measures for shift- 
ing resources out of the overexpanded or high-cost area. Nor 
is it difficult to document these charges from the history of 
commodity agreements. 

A quota scheme invariably allocates export quotas with 
reference to some base period. The bargaining position of the 
participants determines the base, and in its determination the 
ability to produce at a low cost is only a minor consideration. 
Once fixed, quotas tend to remain fixed, regardless of changes 
that may have taken place in cost relationships. High-cost 
sources will always be allotted a quota if only because it is 
necessary to include all important sources in the agreement. 
Thus not only is high-cost production encouraged, when 
otherwise it would certainly be eliminated, but the expansion 
of low-cost production is discouraged by discriminatory 
quotas. A favored phrase for this rigid allocation of exports 
is "orderly marketing," but, as Davis remarks, "if nature 
happens to give Argentina a large crop and Canada a small 
one, true 'orderly marketing' would call for enlarged exports 
from Argentina and reduced exports from Canada."^ 

Quota allocation by intergovernmental agreement is gen- 
erally less responsive to changing market forces than private 
cartel allocation, since the capacity of governments to resist 
a quota reduction is customarily much greater than that of a 
private enterprise. Furthermore, because cartel agreements 
are more unstable, recurring inroads of competition tend to 
alter quotas in favor of low-cost producers when the agreement 
is renewed. Speaking of tin, Rowe observes: 

If the tin scheme were a private agreement between the pro- 
ducers, one might reasonably expect the low-cost producers of 
Malaya and the Dutch government (as the virtual owner of the tin 
industry of the N.E.I.) to insist on the maintenance of a reasonably 

1 Davis, op. cit.y p. 61. 

• 232 • 

Buffer Stocks and Quota Schemes 

low-price level so as to insure the least possible measure of friction, 
and to break away from the scheme as conditions become more 
favorable, thus allowing laissez-faire to rid the industry of its high-cost 
surplus capacity. As it is, there seems small chance of any such 
event especially in view of the presence of relatively high-cost as well 
as low-cost producers within the British Empire.^ 

It was pointed out earlier that the antecedents of inter- 
governmental commodity agreements are frequently private 
cartel arrangements or national valorization schemes. Pro- 
ducer interests that are controlling in the original under- 
takings are usually carried over pretty much intact into the 
succeeding agreements. If surpluses and chronic overproduc- 
tion are to be avoided, the restriction of supply in order to 
maintain or raise prices has a certain justification. But 
producers are usually not the best judges of how^ much restric- 
tion or price raising is compatible w^ith a broad consideration 
of public interests. This objection is customarily met with 
the reply that proper concern for these broader interests will be 
assured by adequate consumer representation in commodity 
controls. Whether this claim is altogether warranted will be 
seen from a brief examination of the history of consumer 
representation in commodity control schemes. 

In the case of intergovernmental quota schemes initiated and 
enforced by importing countries, it must be assumed that the 
consumer interests of the members are taken into account. 
The British market for imported beef is divided by agreement 
between Britain and her principal suppliers, and the agree- 
ment is enforced by means of import quotas. The British 
were interested in protecting domestic producers and in 
assuring Empire producers of an export market without 
unduly raising the price to consumers. Rather than impose 
a tariff that would have adversely affected consumers, Britain 
entered into an arrangement that assigned quotas to the princi- 
pal exporters and at the same time subsidized her domestic 

1 Index, Svenska Handelsbanken, April, 1935, cited in Eugene Staley, Raw 
Materials in Peace and War, Council on Foreign Relations, New York, 1937, p. 109. 

• 233 • 

Controlling World Trade 

producers/ The scheme obviously tends to perpetuate high- 
cost production and to freeze exports in certain channels, but 
just as obviously it has not been imposed on consumers by 
exporting countries interested in maximizing the price of beef. 

The United States has similarly made itself responsible for 
enforcing an agreement to divide the American market among 
Latin American producers of coffee. Although political 
considerations rather than consumer prices furnished the 
motive and although in the first few years the price of coffee 
was fixed at a generous level, more recently the American 
government, using the machinery of the coffee agreement, 
has resisted the pressure of exporting interests for an upward 
revision of price. Since, in later years, quotas were set at so 
high a level that exports were practically unrestricted, the 
chances are that channels of trade in coffee have not been 
appreciably altered. In any case the coffee agreement can- 
not be said to represent producer exploitation of consumer 

At the opposite extreme from these import-quota agree- 
ments are the controls on rubber and tin. No provision 
was made at the outset for consumer representation, but 
criticism of the rubber agreement at the World Monetary and 
Economic Conference of 1933 and an outcry against the price 
policy of the tin control in 1934 led at least to remedial ges- 
tures. The rubber agreement admitted three advisers or 
observers representing the processing interests of the three 
principal rubber-consuming countries: the United States, 
Great Britain and Germany. The 1938 agreement doubled 
the number of American advisers, but these two observers, 
without vote, attended by no means all the meetings of the 
International Rubber Regulation Committee. Such influ- 
ence as they were able to exert appears to have consisted 
chiefly in calling attention to the limited alternative sources of 

1 Cf. J. D. Black and Stanley S. Tsou, "International Commodity Arrange- 
ments," Quarterly Journal of Economics ^ Vol. LVIII, No. 4 (August, 1944), p. 528. 

• 234 • 

Buffer Stocks and Quota Schemes 

Leading tire manufacturers were themselves the owners of 
rubber plantations in the East Indies, Liberia and elsewhere. 
The processing industry, furthermore, customarily carried 
several months' supply of crude rubber as inventory, and the 
annual yield of reprocessed rubber was always capable of 
considerable expansion. Consequently, rubber manufactur- 
ers were able to point out that the monopoly of the participants 
was not complete. Recognition of this fact, combined with 
previous "unfortunate" reactions to unjustifiable price in- 
creases, tended to produce v/hat may be called a rational 
monopoly policy having due regard for the demand situa- 
tion. If the rubber agreement is eventually revived, the posi- 
tion of the United States should be greatly strengthened by 
virtue of its synthetic capacity. 

The Tin Control's concession to consumer representation 
was even less satisfactory. Although the first tin agreement 
was modified to permit the inclusion of tin advisers represent- 
ing the United States and Great Britain, the two leading 
tin-consuming countries, and although this modification was 
confirmed in later agreements, these gentlemen were not 
invited to advise on questions of production or price. ^ In the 
drama unfolded by the Tin Control, the role of the consumers' 
representative was that of the muffled drum, decidedly off* 

Between these extremes of import-dominated and export- 
dominated quota schemes fall most of the other important 
commodity agreements. Since tea is mainly consumed as 
well as produced within the political area covered by the tea 

1 In the apologetic of the Tin Producers' Association, {International Tin Control 
and Buffer Stocks, p. 13) it is reported that 

The Committee soon appreciated the importance of the help which such 
[consumers'] representatives could give and at a meeting of the International Tin 
Committee held on August 13, 1934, it was unanimously decided that a panel 
representing the chief consuming countries should be invited to attend the 
Committee meetings at which any subjects directly concerning the interests of 
consumers were under discussion. 

[Apparently consumers have no direct interest in prices or production.] 

• 235 • 

Controlling World Trade 

agreement, exploitation of consumer interests would probably 
not be tolerated even if it were practicable. Tea prices have, 
in fact, remained both stable and moderate under control. In 
the sugar agreement, 1 7 per cent of the votes have been cast by 
the United States and 17 per cent by Great Britain, both 
heavy sugar importers whose influence has, in general, 
favored the expansion of exports from low-cost areas. ^ For 
the enforcement of restrictive provisions, the sugar agreement, 
as well as the Draft Wheat Convention, depends to a con- 
siderable extent upon the policing of quotas by importing 
countries. Both the Draft Wheat Convention and the 
proposed cotton agreement will, it is expected, be open to 
importing as well as exporting countries. 

The eff"ectiveness of an importing country's representation in 
a commodity control scheme would seem to depend largely 
on whether that country's cooperation is necessary to the suc- 
cess of the scheme. If importing countries must enforce the 
quotas, or if they can make their own supply arrangements 
with large-scale exporters, then their cooperation is defmitely 
necessary. These conditions can be said to apply to almost all 
the major agricultural products traded internationally and to 
many if not most of the metals. Tin alone is an exception, for 
not only are import quotas unnecessary to the enforcement of 
controls, but the principal consumer has no efl'ective access to 
tin sources outside the agreement. 

It must be emphasized, however, that representation of 
consumer countries is not representation of consumer interests. 
Direct representation of ultimate consumers is presumably out 
of the question, and even such remote concern for consumer 
well-being as is manifest in the public representation of an 
importing country can usually be related to other considera- 
tions. Great Britain's interest in the beef agreement is 
attributable as much (and perhaps more) to her concern for 

1 Yates, op. cit., p. 64. "In respect of fair representation of importers as v^ell as 
exporters the Sugar Council has been a model of propriety among all the prewar 
commodity schemes." 

• 236 • 

Buffer Stocks and Quota Schemes 

domestic and Empire producers as to a regard for her con- 
sumers. Although American interest in the coffee agreement 
has by now been mainly converted to protection of consumer 
interests, it was at first almost exclusively one of national 
defense. Nevertheless, there is always a greater likelihood 
that consumers will fare better from the operations of a 
control scheme in which importing countries are effectively 

Restriction of exports and raising of prices are not neces- 
sarily contrary to long-run consumer interests, although ideally 
the price should be stabilized at a level no higher than is 
required continuously to yield adequate supplies of the com- 
modity under regulation. Even though consumers might 
temporarily be benefited by the lower prices associated with 
chronic overproduction, it could probably be shown that their 
broader interest in preserving political and economic stability 
would justify a higher regulated price. To say this is merely 
to recognize that conditions of production, extraction or 
export that do adequate justice to all interests concerned may 
be more closely approximated by public action than by the 
unregulated forces of the market.^ 

It can scarcely be said, however, that this justification can 
be claimed for international commodity controls as they have 
functioned in the past. In many agreements, decisions as to 
proper output and proper price have been made exclusively 
by and in the interests of producers, and, in all, quota alloca- 
tions have protected high-cost sources without regard to chang- 
ing demand and supply conditions. Possibilities for a sub- 
stantial revision of commodity controls, perhaps under the 

1 Cf. Watkins, op, cit., p. 231. 

Notwithstanding all the manifold difficulties standing in the way of an exact 
assessment of costs and a nice determination of values, practical exigencies con- 
strain us to recognize that there is in respect of every specific supply problem a 
scale of adequacy. For each raw material there is a rate of supply in the matrix 
between the ever-receding past and the oncoming future which is 'most con- 
venient' all around. A supply that falls short of, or exceeds, that rate exacts 
sacrifices of some interests that outweigh the benefits conferred upon others. 

• 237 . 

Controlling World Trade 

aegis of an International Trade Organization, will be dis- 
cussed in the next chapter. 

A commodity agreement that does no more than allocate 
shares in an existing volume of trade will have no effect what- 
ever on the surplus capacity that presumably occasioned the 
agreement. Since one way of removing or lessening a surplus 
is to expand consumption, most commodity agreement pays 
at least lip service to this objective, and some have actually 
accomplished considerable market expansion through reduc- 
tion of trade barriers. The Brussels Sugar Convention of 1 902 
is notable in this respect and well worth emulating. If trade 
barriers are to be effectively reduced, however, importing 
countries must be treated as full partners, but this would run 
counter to the producer orientation of most agreements. Con- 
sumption may also be expanded by the discovery of new uses 
for a commodity, and the international commodity control can 
frequently sponsor the necessary research and experimenta- 
tion. The Tin Control has been particularly energetic in 
developing new lines, although whether its efforts to increase 
consumption counterbalanced the effects of its high-price 
policy is an open question. 

Granted that commodity agreements have not done so much 
as could be done to expand consumption, there are a num- 
ber of raw material industries in which, even with maximum 
consumption, there would still be serious over-capacity. In 
these industries resources will have to be converted to other 
uses if restriction of output is to be avoided or at least limited 
in duration. A shift of resources, however, lies outside the 
capacity of single-industry planning, since it necessitates pro- 
vision of employment opportunities elsewhere in the economy. 

It can therefore be argued against commodity controls that, 
by temporarily alleviating the distress of producers, they tend 
to postpone or otherwise prevent the inauguration of policies 
looking toward economic expansion through trade-barrier 
reduction, industrialization or other forms of publicly fostered 
economic development. There is enough force in this argu- 

• 238 • 

Buffer Stocks and Qiiota Schemes 

ment to warrant making the proof of adequate provision for a 
shift of resources a condition to the approval of a commodity 
control scheme. 

Despite the strength of the argument against quota schemes, 
can they not perform a justifiable function in alleviating post- 
war surpluses pending the application of more enlightened 
policies? The critics of commodity control look toward 
either a drastic clearing away of the barriers to trade and to 
private enterprise (on the implicit assumption that a return to 
the dynamic and flexible capitalism of the late nineteenth 
century — if it can be managed — will solve the problems of 
distressed areas) or a national and international public and 
publicly encouraged investment program that, by stepping up 
the rate of industrial expansion, would shift resources out of 
these areas. It does not seem to the author that either pros- 
pect is sufficiently near realization to justify ignoring the 
question of how, for an indeterminate period, the incomes of 
some groups of raw material producers may be maintained, 
pending transfer of underemployed resources out of particular 

Certain of the raw material industries that suffer from 
chronic overproduction are important to international trade; 
unless the scaling down of exports and production can be 
accomplished by international agreement, there will be an 
irresistible tendency to shift the burden of surplus disposal to 
other shoulders by unilateral action. By tariff's or other 
means, net importers will protect their domestic production 
against low-priced imports. Exporting countries will rely 
on their financial strength to maintain domestic prices and to 
retain or increase their share in the foreign market by export 
subsidy. Economically undeveloped countries, whose supply 
of foreign exchange is dependent on the export of one or a few 
raw materials produced in surplus, will be forced to limit 
imports by exchange control and other nieans. 

The pattern of the 1930's can be repeated, and it may be, 
unless energetic measures are taken to avoid it. One policy of 

• 239 • 

Controlling World Trade 

prevention lies in negotiating intergovernmental restrictive 
agreements for those commodities whose persistent surpluses 
may, without benefit of agreement, compel unilateral action 
even less conducive to the desired expansion of international 
trade and economic activity. 






BEFORE the war United States foreign economic policy was 
not oriented along commodity lines. Sporadic govern- 
mental intervention to help secure or protect oil concessions, 
or to adjust disputes concerning American oil investments 
abroad, had given us the beginnings of a foreign oil policy. 
Domestic agricultural policy of the 1930's succeeded in pricing 
traditional American exports out of the foreign market, and by 
1938 had resorted to export subsidies in an attempt to pre- 
serve, primarily for wheat and cotton, what was left of this 
market. American dependence on imports of certain com- 
modities controlled by foreign monopolies, notably tin and 
rubber, excited Congressional investigation but produced no 
positive action. Firrally, prospective shortages of various 
strategic materials led, immediately before the war, to the 
rubber-cotton barter agreement and to the stockpiling, on a 
very small scale, of a few materials. Our general commercial 
policy was not, however, markedly influenced by the particular 
problems of specific commodities. 

The war and a continued high-price domestic policy for 
agriculture have changed, and will change, this situation 
rather drastically. The end of the period of war-induced 
scarcities will leave us with large stocks of — and excess pro- 
ductive capacity for — aluminum, magnesium, rubber, nitrates, 
copper and some other industrial materials. A national pol- 
icy for these commodities will have to be developed with due 
regard for what is done about similar surpluses in other coun- 
tries. War requirements and dwindling American resources 
have brought sharply to the fore the relation of specific com- 

• 241 . 

Controlling World Trade 

modities to national security. To safeguard our access to 
these materials, it may be necessary to embark on a program 
that will include, all or severally, stockpiling, the expansion 
and protection of American holdings abroad, the develop- 
ment of substitutes and the conservation of domestic sources. 
In such a situation, international collaboration may be re- 
quired to avert a competitive scramble for scarce resources. 

Our high-price policy for agriculture has brought a use of 
export subsidies that can only be regarded by other countries 
as an instrument of economic warfare. Simultaneously, our 
government has pressed, and is pressing, for international 
commodity agreements as a way of assuring our export posi- 
tion for wheat and cotton. It is impossible, however, to pro- 
tect our market position for these commodities unless, by par- 
ticipating in control schemes, we help other countries to pro- 
tect their position in other commodities. Thus is our foreign 
economic policy developing along commodity lines. 

A national policy with respect to a particular commodity 
can be formulated without international consultation, and inter- 
national consultation can be undertaken without consumma- 
tion of a restrictive commodity agreement. Commodity policy, 
therefore, covers a much broader field than the international 
commodity controls on which this study has focused attention. 

We shall have to develop a policy regarding the disposal 
of government-owned magnesium and aluminum plants, 
although this will probably not involve us in international 
negotiations, much less in restrictive intergovernmental agree- 
ments. How we dispose of or operate our synthetic-rubber 
plants, however, will have a foreign influence of such magni- 
tude, and over such far-flung areas, that we cannot afl^ord to 
ignore the possible consequences. Our oil policy, similarly, 
cannot be pursued in an international vacuum. National 
policy affecting these commodities and perhaps a very few 
other nonagricultural materials such as, possibly, nitrates 
and copper, should be formulated only after careful consulta- 
tion with other interested countries. If the problems involved 

• 242 • 

American Literests and Commodity Policy 

are recurrent, these consultations should probably be organ- 
ized in the form of a so-called study group. Finally, the 
prospects of chronic overproduction of some raw materials 
justify further concerted action, perhaps in the form of quota 
schemes with or without a provision for buffer stocks. 

It seems probable that the main lines of United States com- 
mercial policy will be worked out in collaboration with other 
nations, using the various international organizations already 
established or in process of formation. The process will then 
be one of give and take, and the environment will be one in 
which considerations of political stability and international 
security will strongly color the solutions of economic problems. 
In this setting, the influence of the United States will be 
strong but not paramount. 

Granted that we have an immediate interest not only in 
liberalizing foreign trade but preserving private trading oppor- 
tunities and institutions, and that we also have reason to sup- 
port international organizations designed to adjust and recon- 
cile the conflicting interests and intentions of a large number 
of participating countries, what considerations should govern 
our commercial policy in general and our commodity policy 
in particular? Two that need to be examined before we can an- 
swer this question are: the export-import position of the United 
States with respect to raw materials and the bearing of our 
domestic agricultural policy on the whole commodity field. 


Our postwar imports, not only of raw materials likely to be 
subject to control but of all raw materials, will in all probabil- 
ity greatly exceed our exports. Even at a very low level of 
national income, our raw material imports are larger than 
our exports, and this excess tends to increase rapidly with a 
rise in national income; at levels possible with full employ- 
ment, the excess of raw material imports over exports might 
be in the neighborhood of $750 million to $1 billion per 

• 243 • 

Controlling World Trade 

annum. U.S. Department of Commerce figures on the pre- 
war foreign trade of the United States in raw materials and 
unprocessed foodstuffs are given below. For purposes of 
comparison, the Department of Commerce estimates of 
national income at market prices are also shown. 

United States Foreign Trade in Raw Materials and National Income 
(Trade in millions and national income in billions of dollars) 











































Even in 1934, a year of very low income, raw material 
imports were slightly in excess of exports. The drop in 
imports in 1938 is explained by the large inventory accumula- 
tion of raw materials in 1937, a year of relatively high business 
activity followed by a sharp recession. Between 1934 and 
1937, when national income rose by slightly more than $20 
billions, imports of raw materials and unprocessed foodstuffs 
increased by more than $600 million. Thus for every billion 
dollars of added income, raw material imports increased by 
$30 million. Although data for later years indicate that these 
figures somewhat overstate the relationship, it appears that on 
the average a $25 million increase in imports of raw materials 
and unprocessed foodstuffs may be expected to accompany a 
billion dollar increase in national income. 

A high level of industrial production absorbs large quanti- 
ties not only of imported but also of domestic raw materials, 
much of which would otherwise seek export markets. If the 
relationship between rav/ material imports and national 
income is projected to a full employment level, then a national 

• 244 • 

American Interests and Commodity Policy 

income, say, of SI 30 to 8140 billion would call for raw material 
imports of around $2.4 billion annually. This estimate, it is 
true, ignores the probable effect of domestically produced 
synthetics as substitutes for imported raw materials, including 
silk and rubber in particular. On the other hand, our dwin- 
dling sources of oil, bauxite, copper, lead and zinc will 
increase our dependence on other imports. A rough esti- 
mate of our peacetime position with respect to raw materials 
and imported foodstuffs v/ould presuppose, at full employment 
incomes, an import of from $2 to $2.5 billions and an export 
of not much more than SI. 2 billions (at 1940 prices). In 
other words, our consumer interests in raw material foreign 
trade far outweigh our producer interests. 

Not all the raw materials entering the foreign trade of the 
United States are susceptible to restrictive international con- 
trols, so that it is difficult to forecast within what areas 
these controls will be applied. An examination, however, of 
prewar exports and imports of commodities for which agree- 
ments either exist or are under serious consideration does not 
change the essential ratios indicated above. If prewar 
imports and exports are compared for a group of commodities 
embracing wheat, cotton, tin, rubber, sugar, coffee, tea and 
cocoa, it v/ill be found that even at low levels of national 
income the United States has an import balance, and that the 
balance mounts rapidly with a rise in national income. 

Total United States Trade in Wheat, Cotton, Rubber, Sugar, Coffee, 
Tin, Tea and Cocoa 
(In millions of dollars) 


































Controlling World Trade 

Certain commodities of which we are importers will con- 
tinue to be controlled by international agreement, regardless 
of any attitude the United States may take. In all probability 
this will be true of tin and tea. Rubber, the largest of our 
prewar raw material imports, will now be in a very different 
position, since the United States, if it so desired, could achieve 
practical self-sufficiency. Our participation in the sugar 
agreement will presumably protect any consumer interests 
we wish to protect. There are, however, a number of other 
raw materials of which the United States will be an important 
importer, and many of these are minerals and metals that are 
susceptible to international control. Whether they will in 
fact be controlled will depend to a considerable extent on the 
American attitude toward commodity agreements. 

The only commodities for which international control is 
pending and of which the United States is on balance an 
exporter are wheat and cotton. Domestic consumption of 
cotton responds readily to changes in national income, and in 
1942 reached the phenomenal figure of 11.6 million bales, 
exhausting mill capacity. Since then, labor shortages have 
caused a recession from this figure. 

Although a substantial part of the 1942 total represented 
industrial consumption of cotton for war purposes, it must also 
be remembered that civilian demand v/as sharply checked by 
regulation. Under conditions of full employment a projected 
civilian consumption of 10 to 11 million bales seems not 
exaggerated. Since the average annual crop during the 
1930's was only slightly over 12 million bales, this rate of 
consumption, if maintained, would leave an exportable sur- 
plus of not more than 2 million bales. These figures, however, 
do not tell the full story. Cotton production was controlled 
during the 1930's and there is no way of estimating what 
quantity of cotton American farmers will want to produce, 
or be allowed to produce, henceforth. Maintenance of a full- 
employment rate of consumption, moreover, is an excessively 
optimistic premise. The fact remains, however, that our 

• 246 • 

American Interests and Commodity Policy 

export interest in cotton varies inversely with the size of our 
national income. 

This does not apply to wheat, but here our recent and 
prospective export interest is relatively slight. The consump- 
tion of wheat as food does not respond to changes in the 
national income. From 1934 to 1937, for example, national 
income increased by about 40 per cent, while consumption of 
wheat as food increased from 463 to 472 million bushels, a 
rise of less than 3 per cent. While wheat exports in the 
1930's, which include the drought years, are misleading as a 
gauge of future prospects, a postwar annual export of 100 
million bushels would be large. Wheat does not constitute a 
very important fraction of our international trade interests. 

One may question, therefore, whether American export 
interests in cotton and wheat are large enough to justify the 
promotion of restrictive agreements for these commodities, if 
their promotion would require us to initiate a reciprocal series 
for commodities which, on balance, the United States imports. 
Other considerations, it is true, enter into the shaping of any 
policy on international commodity agreements, but it should 
be borne in mind that America's interest in raw material 
imports is greater and, under reasonably prosperous condi- 
tions, very much greater, than our interest in exports. 


In determining our attitude toward international com- 
modity control, a factor of some importance will be the 
effect of domestic agricultural policy on the prices and output 
ol American farm products. It is not the function of this 
report either to forecast or to recommend policy in the field of 
domestic agriculture. An admirable study of this subject, by 
T. W. Schultz, has already appeared under the auspices of the 
Committee for Economic Development.,^ It is clear, how- 
ever, that our present agricultural policy is in serious conflic 

1 Schultz, op. cit. 

• 247 • 

Controlling World Trade 

v/ith our announced aims in the field of international trade 
and, if continued, may eventually commit us to a permanent 
program of export subsidy or to active participation in 
restrictive commodity agreements, or to both. If Professor 
Schultz's principal recommendations concerning the main- 
tenance of farm income and forward pricing v^ere to become 
policy, the present conflict would be in large part removed. 
From the standpoint of American foreign interests, this devel- 
opment would be highly desirable, but whether these recom- 
mendations are politically practicable, or whether they would 
be considered desirable public policy, we are not equipped 
to say. The following analysis, therefore, will be limited to a 
consideration of the implications of our present agricultural 
program — and of a suggested alternative — ^for our foreign 
trade, with particular reference to commodify controls. 

Before 1939 our agricultural policy, except as it affected cot- 
ton, had little influence on our foreign trade. With cotton 
the sole exception, the acreage limitations of the AAA did 
not succeed in reducing output or materially increasing prices. 
The loan rates of the Commodity Credit Corporation, which 
tended to become, in effect, minimum prices did not, save for 
cotton, seriously overprice farm products until 1939 and 1940. 
However, the effect of acreage allotments and nonrecourse 
loans on cotton prices was pronounced; American cotton was 
progressively priced out of the foreign market while excess 
stocks were accumulated by the CCC. In the two years 
immediately preceding our entry into the war, the overpricing 
of other farm products by nonrecourse loans led also to the 
accumulation of excessive stocks. After 1941, war demands, 
together with the consumption of wheat for feed, saved the 
CCC from further disastrous stock accumulation. 

The focus of the agricultural program shifted in 1941 away 
from acreage allotments to minimum prices as the principal 
instrument for controlling output. Prices were supported by 
CCC nonrecourse loans, whose rates, announced in advance of 
planting, became a useful device for stimulating the output of 

• 248 • 

American Interests and Commodity Policy 

many crops needed to meet wartime demands. The rates 
were percentages of obsolete parity prices, and as demand 
recedes from wartime levels a continued attempt to support 
these prices will leave them far out of line not only with world 
market prices but with domestic price relationships as well. 

By the end of the war, the price-support program had been 
extended to cover most farm products, and legislation had 
been enacted for many crops for two years after the January 
first following Presidential determination that the war- 
emergency period is over. Not only was price support made 
mandatory for basic commodities (cotton, wheat, corn, 
tobacco, rice and peanuts) at 90 per cent of parity (92.5 per 
cent in the case of cotton), but for other commodities whose 
expansion of output was determined by the Secretary of 
Agriculture, under the Steagall Amendment, to be required 
for war purposes. Although the resources of the U.S. Depart- 
ment of Agriculture may not be adequate to maintain the 
prices of all these commodities at 90 per cent of parity against 
declining demand, the effect of the program will certainly be 
to price most farm products out of the foreign market. 

Difficulties encountered in selling cotton abroad led to the 
use of export subsidies in 1939 and again in 1942, and in the 
Surplus Property Act of 1944 Congress authorized the Com- 
modity Credit Corporation to sell abroad "at competitive 
world prices, any farm commodity or product thereof."^ 
Cotton is already being exported at 4 cents less than the 
domestic price, and there is every prospect that this differential 
will have to be increased. Wheat and flour have also been 
subsidized for export. To avoid the piling up of stocks as 
rehabilitation demands slacken, the export of other commod- 
ities will have to be subsidized. The continuation of a 
policy of supporting domestic agricultural prices at high 
levels means, of course, that a two-price plan is inevitable, 
unless we are prepared to forego our traditional export 
markets for farm products. 

1 Public Law 457, 78th Congress, Sec. 21, p. c. 

• 249 • 

Controlling World Trade 

The use of export subsidies, however, accords ill with our 
professed aims in the field of commercial policy and has 
frequently been the source of considerable embarrassment to 
our representatives in international economic negotiations. 
It is difficult to make other countries see the wisdom of reduc- 
ing trade barriers and abandoning various beggar-my- 
neighbor policies, when the United States continues to push 
its agricultural exports by the very means it overtly condemns. 

Legislative authorization of sales abroad at competitive 
prices constitutes both a threat to the export of other countries 
that may thus be forced to enter into market-sharing agree- 
ments with the United States, and an inducement to this 
government to seek such agreements as a means of limiting 
export subsidies and to avoid retaliatory measures. The 
initiative for both the Draft Wheat Convention and the pro- 
posed cotton agreement was supplied largely by this country, 
and, although a sharing of the foreign market can hardly do 
away with export subsidies so long as we maintain a policy of 
high domestic prices, it would presumably limit both the 
extent of the subsidy and the volume of subsidized exports. A 
marketing agreement might also check any tendency toward 
commercial retaliation that an unlimited subsidization would 
almost certainly provoke. 

Our current agricultural policy, then, can be used as a 
weighty argument for a program of international commodity 
agreements, and people in government circles who favor the 
former are likely to be strong advocates of such agreements. 
Unfortunately, we shall probably not be able to induce other 
countries, either by threat or persuasion, to cooperate in 
controls affecting our agricultural exports unless we cooperate 
in controlling other commodities which we largely import. The 
larger aspects of commodity and commercial policy, however, 
tend usually to be subordinated to interests inside and outside 
the government that seek to maintain both high domestic 
prices and an export market for agricultural commodities. 

The support of farm incomes — instead of farm prices — by 

• 250 • 

American Interests and Commodity Policy 

compensatory payments or some other type of government 
grant would go far toward eliminating the need for restrictive 
international commodity controls created by lifting domestic 
prices far out of line with the world market. Nevertheless, 
even if American farm prices were allowed to fall to world mar- 
ket levels, while incomes were maintained, at least one chronic 
surplus, in cotton, would continue to plague American agri- 
culture. Wheat, with prices at competitive levels, would 
probably be extensively used for feed, and, at a level permitting 
wheat to be substituted for corn, all the wheat we are likely 
to raise could be cleared from the market. A fats and oils 
surplus, in the United States or in the world, is likely to be of 
short duration if prosperous conditions can be maintained. 

With respect to cotton, however, there are just too many re- 
sources employed. To sell all the cotton we are likely to pro- 
duce and, in addition, to dispose over a period of time of excess 
stocks of 20 million bales, the world price would have to fall to 
a low level indeed. Until the economy of the South can be 
drastically oriented away from cotton culture, there will con- 
tinue to be too much cotton produced in the United States and 
in the world. A pronounced fall in cotton prices would go far 
toward redressing the balance between consumption and pro- 
duction, particularly if a low price were accompanied by a high 
level of industrial production, but it would not go far enough. 

Abandonment of our high-price policy in domestic agricul- 
ture would not, then, completely remove the impetus to inter- 
national control of raw materials, though it would contribute 
somewhat to that end. It would, though, remove the incon- 
gruous spectacle of the United States waving aloft the cudgel 
of export bounties to coerce some countries into restrictive 
commodity agreements, while beckoning others toward the 
promised land of reduced trade barriers. It would reduce the 
role of commodity controls more nearly to that of managing 
unavoidable surpluses, instead of managing surpluses induced 
by national policy. Such a change in our agricultural pro- 
gram would greatly further that liberal commercial policy so 

• 251 • 

Controlling World Trade 

obviously in the interest of the United States both economically 
and politically, but an adequate examination of this sort of 
policy change, including its political feasibility, lies outside the 
scope of this study. 


If the predominance of imports in our foreign raw materials 
trade militates against restrictive commodity agreements, 
while our domestic agricultural policy leads us to look on them 
with favor, so also does conflict appear between our broader 
economic and political interests in the postwar organization of 
world trade and our policy alternatives on international com- 
modity controls. Decisions on policy must be influenced by a 
series of such considerations as that American predilections 
for multilateral trade conducted by private enterprise are 
opposed by the desire of certain groups for a greater measure 
of intergovernmental planning; that the existence of war- 
created surplus stocks and facilities poses problems not easy 
of solution by the unregulated processes of market adjustment; 
and that the continued prosperity of countries in which we 
have a political interest may require protective intervention. 
The United States, moreover, has taken the lead in establishing 
international institutions whose purpose is to reconcile con- 
flicting economic interests by peaceful negotiation and adjust- 
ment. We may be said, therefore, to have a sufficiently vital 
interest in maintaining and strengthening this international 
machinery as to justify some measure of compromise with 
respect to our immediate economic objectives. 

It has been the argument of the preceding chapters that 
under certain specified conditions the commercial policy of 
the United States should make provision for a limited number 
of intergovernmental quota schemes, designed to prevent 
raw material prices from falling to competitive levels, and that 
in conjunction with them buff'er stocks can frequently exert 
a useful price-stabilizing influence. The questions that need 

• 252 • 

American Interests and Commodity Policy 

now to be considered are: what limits should be imposed on 
these controls; what conditions should they satisfy; and how 
may controls for a particular commodity be integrated with 
the larger framework of international economic organization? 

Considerable attention has recently been given to these 
questions by members of executive departments of the United 
States government. Their views, as they had developed prior 
to the technical discussions with representatives of the United 
Kingdom late in 1945, were presented on Apr. 5, 1945 by 
B. F. Haley, then director of the Office of International Trade 
Policy in the U.S. Department of State, in a speech entitled, 
"United States Policy Regarding Commodity Agreements."^ 
Following discussions with British representatives on a "tech- 
nical level" the Department of State issued, on Dec. 6, 1945, 
its Proposals for the Expansion of World Trade and Employment 
which contains, in Chap. V, proposals concerning intergovern- 
mental commodity arrangements.^ A comparison of the 
Proposals with Haley's statement indicates that no substantial 
modification of principle has resulted from the commercial 
policy discussions. In the following paragraphs, the argu- 
ment regarding the proper scope and character of commodity 
agreements is developed point by point in comments on the 
Department of State Proposals. 

The recommendations they contain are limited to primary 
commodities on the ground that production and trade in these 
commodities are subject to peculiar vicissitudes that "may 
have such widespread repercussions as to prejudice the 
prospect of the general policy of economic expansion."^ 

1 Reprinted in Proceedings of the Academy of Political Science, Vol. XXI, No. 3 
(May, 1945). 

2 The Proposals, with which "the Government of the United Kingdom is in 
full agreement on all important points," have been transmitted to the govern- 
ments of other countries as a basis for discussion in the proposed World Confer- 
ence on Trade and Employment. The text of Chap. V is printed at the end of 
this chapter. 

^ The provisions of Chap. V are "not designed to cover international agree- 
ments relating to the protection of public morals; the protection of human, animal 

• 253 • 

Controlling World Trade 

Provision is made for the establishment of study groups to 
investigate alleged difficulties, and any country participat- 
ing in the proposed International Trade Organization is en- 
titled to ask for a group to make a study of a commodity in 
which it is "substantially interested." Although neither 
buffer stocks nor quota schemes are mentioned, it is made 
clear that "excess supplies" constitute the anticipated diffi- 
culty and that under certain circumstances commodity 
agreements involving restrictions on production and trade 
may be justified. The statement of objectives, however, 
regards such agreements as being transitional in character, 
and a set of complicated — and somewhat muddy — prin- 
ciples is proposed, of which one purpose is clearly to make 
the justification of commodity agreements difficult. 

Members of the proposed International Trade Organiza- 
tion, moreover, are asked to adhere to certain conditions af- 
fecting the operation of commodity agreements. It is further 
stipulated that the ITO shall include a Commodity Com- 
mission that will study commodity problems, make recom- 
mendations to the ITO executive board, and review the 
operations of existing commodity agreements. The substance 
of the Department of State proposals, to which we now turn, 
is contained in the statement of "Objectives," "Principles," 
and the conditions governing the "Operation of Commodity 

If preferred measures for increasing the consumption of a 
commodity are inadequate to prevent a general surplus, an 
agreement involving restriction of production or trade may be 
. . . to achieve the following objectives: 

{a) To enable member countries to find solutions to particular 

or plant life or health; the conservation of reserves of exhaustible natural re- 
sources; the control of international monopoly situations; or the equitable dis- 
tribution of commodities in short supply." Cf. Paragraph 9. To this list of 
exceptions should be added agreements to undertake commodity sanctions 
against a potential aggressor; these sanctions, if undertaken, would presumably 
be administered by the Security Council of the United Nations. 

• 254 • 

American Interests and Commodity Policy 

commodity problems without resorting to unilateral action that tends 
to shift the burden of their problems to other countries. 

{b) To prevent or alleviate the serious economic problems which 
may arise when, owing to the difficulties of finding alternative em- 
ployment, production adjustments cannot be effected by the free 
play of market forces as rapidly as the circumstances require. 

{c) To provide a period of transition which will afford opportu- 
nities for the orderly solution of particular commodity problems by 
agreement between member governments upon a program of over- 
all economic adjustments designed to promote a shift of resources 
and manpower out of overexpanded industries into new and pro- 
ductive occupations. 

As a statement of desirable objectives the above paragraphs 
are unexceptionable. It is recognized, and rightly, that, in the 
absence of international agreement, commodity surpluses 
may, under certain circumstances, lead to unilateral action 
more disruptive of trade than the restrictive agreement itself. 
The ultimate corrective, however, is seen to lie in shifting re- 
sources out of overexpanded industries by an expansion of 
opportunities elsewhere in the economy; a restrictive agree- 
ment is regarded only as a transitional measure. 

One cannot forbear asking how long the transition is likely 
to last. The British Empire wool-disposal scheme contemplates 
13 years as the period required to liquidate wool stocks. The 
world cotton surplus, in relation to annual consumption, is as 
large as the wool surplus. Is 13 years the proper transitional 
period to allow for cotton? If agricultural surpluses are really 
to be temporary a notable change will have to take place in 
domestic agricultural policy, not only in this country, but in 
some others. At the present writing no sign of such a change 
is discernible. 

That a postwar control for rubber might be transitory is 
possible. Is the same also true for tin and for tea? The author 
wholeheartedly supports the statement of objectives proposed 
by the Department of State, fully recognizing their implica- 
tions for domestic policy. A reader, however, might be par- 

• 255 • 

Controlling World Trade 

doned for wondering if and how these objectives are to be im- 
plemented by domestic legislation. 

If the Proposals of the Department of State were accepted, 
countries belonging to the International Trade Organization 
would agree to certain "principles of intergovernmental com- 
modity agreements" including a provision (paragraph 4, b, 2) 
obhgating them to refrain from entering any such agreement 
until the proper authorities had determined the existence of a 
condition justifying a restrictive commodity agreement. The 
statement of conditions that would have to be satisfied seems 
to the author cloudy and, in a literal application, probably 
unworkable. Either one of two sets of conditions, which may 
be paraphrased as follows, has to be found: 

1 . (^) A burdensome surplus of a commodity exists in inter- 
national trade; {b) it occasions widespread distress among 
small producers who account for a substantial proportion of 
the total output; {c) its adverse effects cannot be corrected by 
the normal play of competitive forces, because {d) both the 
supply of and the demand for the commodity are inelastic to 
price changes. 

2. {a) Widespread unemployment, unrelated to general 
business conditions, has developed in an industry; {b) the 
situation cannot be corrected rapidly enough to prevent undue 
hardship to workers, because (and here the actual language 
must be quoted since the sense escapes the writer) "(i) a sub- 
stantial reduction of price does not lead to a significant in- 
crease in consumption but leads, instead, to the reduction of 
employment,,^ and (ii) the resulting unemployment cannot be 
remedied by normal processes of reallocation." 

This double set of conditions may be useful in suggesting to 
study groups the sort of data that need to be examined but it 
can hardly serve as an adequate statement of administrative 
standards. The juxtaposition of "surplus" and "small pro- 

1 This strange result no doubt could happen, given certain expenditure pat- 
terns and secondary effects, but it is difficult to see how economic research could 
trace the relevant lines of causation. 

• 256 • 

American Interests and Commodity Policy 

ducers" in the first set indicates, probably, that the framers of 
these proposals had in mind agricultural commodities. The 
emphasis on "employment" in the second set presumably 
refers to nonagricultural raw materials, principally minerals 
and metals. The latter conditions seem particularly ambigu- 
ous and difficult of application. 

The statement of principles also calls for a refusal to partic- 
ipate in commodity agreements prior to the "formation and 
adoption by members of a program of economic adjustment 
believed to be adequate to insure substantial progress toward 
solution of the problem within the time limits of the agreement." ^ 

In Paragraph 6 it is proposed that commodity agreements 
should remain in effect initially for no more than five years. 
For most agricultural commodities, the problems that call for 
solution by restrictive agreements are the disposal of surplus 
stocks and the transfer of resources to other uses. The pre- 
requisite of "substantial progress toward the solution" of these 
problems is eminently desirable as a condition of participation 
in restrictive commodity agreements. It is also a condition that 
no commodity agreement to date has met. If rigorously 
applied, it would probably prohibit the commodity agreements 
in which American agricultural groups have a principal 

Consider the case of cotton, with a surplus carry-over now 
somewhat in excess of 20 million bales. "Substantial progress 
toward a solution of this problem" might mean the disposal, 
over a five year period, of from 5 to 10 million bales. If the 
"program of economic adjustment" in cotton is to have any 
prospect of success, production must, during this period, run 
substantially below consumption. Yet at the present level and 
structure of world prices and under existing control policies, 
production will inevitably and persistently exceed consump- 
tion. To bring about the desired reversal of this trend would 
require either a drastic fall in price or a drastic curtailment of 
output, or, very probably, both. Whether cotton-producing 

1 Op. ciL, Chap. V, Paragraph 4, b, 3. 

• 257 . 

Controlling World Trade 

countries outside the United States can or will systematically 
and effectively restrict production is open to doubt. 

If the principles outlined above were vigorously pursued by 
an international cotton control their probable effect would be 
not only to lower world prices but to commit the United States 
to undertaking an extensive shift of resources out of cotton 
culture. The United States has recognized the need for re- 
allocating cotton production resources as its Number One 
agricultural problem for many years, without making any 
progress in this direction. It is therefore doubtful whether a 
domestic economic adjustment requiring curtailment of re- 
sources in cotton would be acceptable to the American govern- 
ment as a condition of adherence to a cotton agreement. 

In these circumstances the practicable alternatives for the 
United States appear to be either a unilateral solution of its 
cotton problem or a less than rigorous application of the 
Department of State's "principles" applying to commodity 
agreements. In the author's opinion the only sensible policy 
for the United States to follow is to abandon price supports, to 
allow the price and output of cotton to be determined by com- 
petition in the world market, and, if necessary, to support the 
incomes of cotton producers while vigorously encouraging a 
shift of resources into other employment. However, reflection 
on the history of domestic agricultural policy leads inescap- 
ably to the conclusions that this country will seek an inter- 
national cotton agreement and that the American negotiators 
will attempt to "rise above principles." 

If the proposals of the Department of State are accepted, 
member governments, besides agreeing to refrain from partici- 
pation in certain undesirable types of commodity agreement, 
will adhere to the following conditions governing the opera- 
tions of agreements in which they participate: 

a. The agreements should be open to accession by any member 
on terms not less favorable than those accorded to members parties 

b. The members adhering to such agreements which are largely 

• 258 • 

American Interests and Commodity Policy 

dependent for consumption on imports of the commodity involved 
should, in any determinations made relating to the regulation of 
prices, trade, stocks and production, have together a voice equal 
to those largely interested in obtaining export markets for their 

c. The agreements should, when necessary, contain provisions 
for assuring the availability of supplies adequate at all times for 
world consumption requirements at reasonable prices. 

d. The agreements should, with due regard to the transitional 
need for preventing serious economic and social dislocation, make 
appropriate provision to afford increasing opportunities for satisfying 
world requirements from sources from which such requirements can 
be supplied most effectively. 

Condition a requires no special comment: that agreements 
be open to accession on equal terms is both desirable and 
practicable. With respect to c, most commodity agreements 
promise "adequate supplies" at "reasonable prices." The 
consummation of these purposes will depend mainly upon 

Although adequate consumer representation is generally 
desirable, as has beei^ stressed throughout this report, it is 
not clear to the author that a rigid application of condition 
b is necessary to satisfy this requirement. If the British wool- 
disposal plan is brought under the control of the ITO, it is by 
no means certain that the functioning of the plan would be 
improved by an equal voting representation of net importing 
countries. It might actually make efTective functioning more 
difficult. In this instance an adviser or observer might per- 
haps better meet the requirement of adequate consumer repre- 
sentation. Nor is it clear that an equal voice for net im- 
porters would improve the working of the International Tea 
Control. It seems desirable to recast this provision in language 
that will permit of alternative solutions. 

Condition d is important but will be difficult to implement. 
The parties to a commodity agreement are not producers but 
governments that frequently represent the interests of both 

• 259 • 

Controlling World Trade 

high- and low-cost producers. The range of cotton-production 
costs in the United States is very wide; similarly, both high- 
and low-cost tin producers are to be found in the territory of 
the Malay States. Furthermore, importing countries are not 
likely to be exclusively consumers of controlled commodities; 
usually there are domestic producing interests to consider, as 
Great Britain has considered hers in the beef agreement. 

Even if high-cost production is concentrated in one or a few 
countries, it is difficult to reduce the export or expand the 
import quotas of these countries. In comparison with the 
bargaining strength of high-cost producers in a private cartel 
arrangement, that of nations is likely to be much stronger. The 
Brussels Sugar Convention of 1902, however, achieved an ex- 
tensive, if temporary, reduction of government aid to high-cost 
sugar production in favor of low-cost areas. 

Concentrating attention on expansion of consumption in 
postwar agreements might at least increase the share of the 
total world market supplied by lost-cost producers even though 
the absolute quantities supplied by high-cost sources remained 
the same. Market-sharing schemes, however, are bound to be 
rigid, and it would be excessively optimistic to believe that 
they can be made responsive to the expanding opportunities 
of low-cost production merely through the acceptance by 
international agreement of a code of principles governing 
commodity agreements. 

The authors of the Department of State Proposals concerning 
intergovernmental commodity arrangements appear to have 
had three main purposes in view: (1) to limit the number of 
commodity agreements by confining them to a very few basic 
raw material industries where persistent overproduction or 
unemployment occasion widespread distress; (2) to frame 
commodity agreements so that all interested countries and 
economic groups are adequately represented and (3) to 
treat commodity agreements as transitional measures valid 
only so long as is necessary to permit a transfer of resources out 
of the distressed areas. 

• 260 • 

American Interests and Commodif/p Policy 

If the proposals were adopted and effectively administered, 
not only would existing controls be thoroughly revised, but 
restrictive provisions would pass out of existence within a 
decade or so after the war. Countries adhering to a com- 
modity agreement would have to commit themselves to a 
definite line of action on their domestic handling of the regu- 
lated commodities. Clearly, the present domestic agricultural 
policy of the United States is quite incompatible with partici- 
pation in the proposed type of commodity agreement. Pre- 
war British and Dutch commodity policies in Southeast Asia 
would also be unacceptable. 

Should the Proposals be accepted, it seems probable that, 
among agricultural commodities, wool, cotton, sugar and 
possibly tea and rubber, might meet the conditions imposed, 
if the participating countries were willing to commit them- 
selves to large changes in their domestic policies toward these 
commodities. Among nonagricultural commodities, possibly 
tin and nitrates might meet the tests suggested. 

Proposals to limit commodity agreements to a few basic raw 
materials and to include, within the framework of such agree- 
ments, adequate measures for import-country representation 
seem to the author desirable and practicable. Equally de- 
sirable is a solution of raw material surplus problems that will 
permit placing a time limit on the restrictive provisions of com- 
modity agreements. But whether this objective is as practic- 
able as it is desirable remains to be seen. 

To bring it about two steps are necessary: (1) a frontal 
attack will have to be made, in this country, on the policy of 
agricultural price supports and, in other countries, on similar 
policies that have the effect of limiting consumption and in- 
creasing production of raw materials already in excess supply; 
(2) in certain instances, national and international programs 
of public — or publicly encouraged — investment and in- 
dustrialization will have to be undertaken to provide employ- 
ment for resources now devoted to raw material production. 

Although an international program of commodity control 

• 261 • 

Controlling World Trade 

may be integrated, at least partially, with a program of in- 
dustrialization, the means necessary to accomplish this inte- 
gration will have to receive considerably more attention than 
they have in the past. Only on the assumption that domestic 
commodity policies can be adapted to international require- 
ments and that employment opportunities can be provided 
for displaced resources, is it practicable to treat restrictive 
commodity agreements as transitional arrangements. If these 
assumptions cannot be fulfilled, the international commodity 
agreement may have to be granted a longer lease on life than 
the Department of State Proposals contemplate. 


Sufficient progress has been made toward formulating a 
program of international economic organization so that we can 
begin to see how an agency dealing with commodity problems 
might fit into the scheme. The charter of the United Nations 
organization stipulates that the work of all international or- 
ganizations dealing with special economic problems, such as 
the Fund, the Bank, and the Food and Agriculture Organiza- 
tion shall in some wise be coordinated through the Social and 
Economic Council. If the Department of State Proposals for 
Expansion of World Trade and Employment are accepted, there 
will be included in the list of special agencies an International 
Trade Organization consisting of a Conference, an Executive 
Board, a secretariat, and three special commissions: a Commer- 
cial Policy Commission, a Commission on Business Practices 
and a Commodity Commission. In addition the Conference 
may create an Industrial and Mineral Unit to exercise the same 
informational functions on behalf of mineral and manufactur- 
ing industries that the FAO exercises on behalf of agriculture. 

The main objective of the proposed International Trade 
Organization is the expansion of world trade. According to 
the analysis of the Proposals: 

International Trade is kept small by four things: (1) Restrictions 

• 262 • 

American Interests and Commodity Policy 

imposed by governments; (2) restrictions imposed by private com- 
bines and cartels; (3) fear of disorder in the markets for certain 
primary commodities; (4) irregularity and the fear of irregularity 
in production and employment, i 

The International Trade Organization would have the 
function of collecting and analyzing information, providing 
technical assistance and making recommendations to member 
governments. With respect to trade restrictions imposed by 
governments and by private combines and cartels, the function 
is clear and within the competence of the organization. If 
trade barriers can be substantially reduced and if member 
countries succeed in maintaining high-level domestic em- 
ployment, a long step will have been taken toward lessening 
the volume of prospective raw material surpluses. In the 
language of the Proposals: "The best cure for any surplus is 
more money in the pockets of consumers. And general 
prosperity will make it easier for people caught by a particular 
failure of demand to shift to other lines where opportunities 
are better.",^ 

II measures for increasing consumption are inadequate to 
reduce a particular raw material surplus, intergovernmental 
consultation is recommended. The International Trade Or- 
ganization is suggested as the proper forum for such consulta- 
tion, and it is further proposed that a Commodity Commis- 
sion be created to advise the Conference and Executive Board 
of the Organization. The Commodity Commission is intended 
to be a fact-finding and consultative body set up primarily 
to establish the need for commodity action, to recommend 
suitable action to the Executive Board of the ITO and to 
oversee the operation of existing commodity controls.^ 

It is especially desirable that the Commodity Commission be 
subordinate to an international trade organization concerned 
principally with expanding world trade through reduction of 

1 Proposals J p. 2. 

2 Op. cit., p. 5. 

3 Ibid., Sec. E. 

• 263 • 

Controlling World Trade 

trade barriers. In respect of this proviso the Department of 
State Proposals are superior to the recommendations of the 
International Labour Office Report on Commodity Control 
Agreements^ and to those of the United Nations Conference on 
Food and Agricukure,^ both of which make reference to an 
independent commodity organization. 

Commodity planners are likely to be excessively concerned 
with the well-being of special groups to the exclusion of 
broader interests. An international commodity organization, 
if left unchecked by a superior agency devoted to liberalizing 
the conditions of international trade, would be prone to con- 
ceive its function as the promotion rather than the limitation 
of commodity agreements. 

It is equally desirable that the organization responsible for 
commodity policy be closely linked with agencies responsible 
for investment, development and industrialization policies. 
The Proposals contemplate bringing the International Trade 
Organization "into relation" with the Social and Economic 
Council and with the other specialized international organiza- 
tions. Until these relations are established, however, it is not 
possible to say whether commodity policy will or can be inte- 
grated with a broader program of economic expansion. 

This report has repeatedly maintained that one-commodity 
regulation can accomplish little toward removing the chronic 
overproduction that has called such regulation into being. 

"^International Commodity Control Agreements (International Labour Office Re- 
port), Montreal, 1942, pp. XXVI, XXVII. 

The constitution of a general international commodity control organization 
would seem essential. Such an authority would be responsible for insuring that 
the general principles subscribed to by governments are respected in the in- 
dividual agreements, and that the schemes for particular commodities are 
adequately coordinated inter se . , , 

The broad effects of the introduction of such a general commodity control or- 
ganization would be to make the schemes for particular commodities tools for 
the execution of a comprehensive policy framed as a part of the general pro- 
gramme of international economic and social development. 

2 Final Act of the United Nations Conference on Food and Agriculture, 
Sec. XXV. 

• 264 • 

American Interests and Commodity Policy 

The remedy lies in expanding production elsewhere in the 
economy, and the direction of this expansion has an im- 
mediate bearing on commodity control. If restrictive com- 
modity agreements are to be limited in number and in dura- 
tion, the overriding objectives of commodity policy must be 
(1) expansion of world trade and (2) provision for alternative 
employment opportunities. 

A good start has been made toward these objectives. There 
is, however, a great gap between the devising of international 
machinery and the implementing of particular policies by 
participating governments. To enable the machinery to 
function, it will be necessary to reshape not only commercial 
policy but policies hitherto considered as belonging to the field 
of domestic regulation, and such action as is proposed can 
only be taken with the cooperation of other governments and 
with due regard for their interests. The United States is 
vitally concerned both in the effective operation of the ma- 
chinery of international collaboration and in the particular 
commercial policies that have been proposed. The question at 
issue now is, will the United States maintain such a high level 
of employment and take such steps to amend her domestic 
agricultural policy as will assure the functioning of the ma- 
chinery and the implementation of the proposals that have 
been advanced? 





Intergovernmental Commodity Arrangements'^ 

The production of, and trade in, primary commodities is exposed 
to certain difficulties different in character from those which 
generally exist in the case of manufactured goods; and these diffi- 
culties, if serious, may have such widespread repercussions as to 
prejudice the prospect of the general policy of economic expansion. 
Members should therefore agree upon the procedure which should 
be adopted to deal with such difficulties. 

1 . Special Commodity Studies. _ 

a. Special studies should be made in accordance with the pro- 
cedure set forth in h, below, of the position of particular 
commodities of which excess supplies exist or are threatened, 
to the end that, if possible, consumption may be increased 
and the anticipated difficulties may thereby be averted. 

b. Members substantially interested in the production or con- 
sumption of a particular commodity should be entitled, if 
they consider that special difficulties exist or are expected to 
arise regarding that commodity, to ask that a special study 
of that commodity be made, and the Organization, if it 
finds that these representations are well founded, should in- 
vite the members principally concerned in the production or 
consumption of that commodity to appoint representatives 
to a Study Group to make a special study of that commodity. 

2. Intergovernmental Commodity Conferences. If it is concluded, in 
the light of an investigation of the root causes of the problem, that 
measures for increasing the consumption of a commodity are unlikely 
to operate quickly enough to prevent excess supplies of the com- 
modity from accumulating, the members may ask the Organization 
to convene an intergovernmental conference for the purpose of fram- 
ing an intergovernmental commodity agreement for the commodity 

3. Objectives of Intergovernmental Commodity Agreements. It should 
be recognized that intergovernmental commodity agreements in- 

1 Tliis is Chap. V of the Proposals. 

• 266 • 

American Interests and Commodity Policy 

volving restrictions on production or trade would be justified in the 
circumstances stated in paragraph 2 above to achieve the follow- 
ing objectives: 

a. To enable member countries to find solutions to particular 
commodity problems without resorting to unilateral action 
that tends to shift the burden of their problems to other 
b To prevent or alleviate the serious economic problems which 
may arise when, owing to the difficulties of finding alterna- 
tive employment, production adjustments cannot be effected 
by the free play of market forces as rapidly as the circum- 
stances require. ' ' '.-. 
c. To provide a period of transition which will afford op- 
portunities for the orderly solution of particular commodity 
problems by agreement between member governments upon 
a program of over-all economic adjustments designed to 
promote a shift of resources and manpower out of over- 
expanded industries into new and productive occupations. 
4. Principles of Intergovernmental Commodity Agreements, Members 
should undertake to adhere to the following principles governing the 
institution of intergovernmental commodity agreements: 

a. Members having an interest in the production or consump- 
tion of any commodity for which an intergovernmental 
commodity agreement is proposed should be entitled to 

. participate in the consideration of the proposed agreement. 

b. Members should undertake not to enter into intergovern- 
mental commodity agreements involving the limitation of pro- 
duction or exports or the allocation of markets, except after: 

1) Investigation by the Study Group of the root causes of 
the problem which gave rise to the proposal; 

2) Determination, in accordance with procedures approved 
by the Organization, either: 

a) that a burdensome surplus of the product concerned 
has developed or is developing in international trade 
and is accompanied by widespread distress to small 
producers accounting for a substantial proportion of 
the total output and that these conditions cannot be 
corrected by the normal play of competitive forces 
because, in the case of the product concerned, a sub- 

. 267 . 

Controlling World Trade 

stantial reduction of price leads neither to a significant 
increase in consumption nor to a significant decrease 
in production; or 
b) that widespread unemployment, unrelated to general 
business conditions, has developed or is developing in 
respect of the industry concerned and that such un- 
employment cannot be corrected by the normal play 
of competitive forces rapidly enough to prevent wide- 
spread and undue hardship to workers because, in the 
case of the industry concerned, i) a substantial re- 
duction of price does not lead to a significant increase 
in consumption but leads, instead, to the reduction of 
employment, and ii) the resulting unemployment can- 
not be remedied by normal processes of reallocation: 
3) Formulation and adoption by members of a program of 
economic adjustment believed to be adequate to in- 
sure substantial progress toward solution of the prob- 
lem within the time limits of the agreement. 
c. Intergovernmental agreement involving the limitation of 
production or exports or the allocation of markets in respect 
of fabricated products should not be resorted to unless the 
Organization finds that exceptional circumstances justify 
such action. Such agreements should be subject to the 
principles set forth in this Chapter, and, in addition, to any 
other requirements which the Organization may establish. 
5. Operation of Commodity Agreements. Members should undertake 
to adhere to the following principles governing the operation of 
intergovernmental commodity agreements: 

a. The agreements should be open to accession by any member 
on terms not less favorable than those accorded to members 
parties thereto. 

b. The members adhering to such agreements which are largely 
dependent for consumption on imports of the commodity in- 
volved should, in any determinations made relating to the 
regulation of prices, trade, stocks, or production, have to- 
gether a voice equal to those largely interested in obtaining 
export markets for their production. 

c. The agreements should, when necessary, contain provisions 
for assuring the availability of supplies adequate at all times 

• 268 • 

American Interests and Commodity Policy 

for world consumption requirements at reasonable prices. 
d. The agreements should, with due regard to the transitional 
need for preventing serious economic and social dislocation, 
make appropriate provision to afford increasing opportuni- 
ties for satisfying world requirements from sources from 
which such requirements can be supplied most effectively, 

6. Termination and Renewal of Commodity Agreements. Inter- 
governmental commodity agreements should not remain initially in 
effect for more than five years. The renewal of an agreement should 
be subject to the principles governing new agreements set forth in 
paragraph 4, above, and to the additional principle that either a) 
substantial progress toward a solution of the underlying problem 
shall have been accomplished during the initial period of the agree- 
ment or that b) the renewed agreement is so revised as to be effective 
for this purpose. 

7. Review of Commodity Agreements. Members should undertake to 
transmit to the Organization, for review, intergovernmental com- 
modity agreements in which they now participate or in which they 
propose to participate in the future. Members should also trans- 
mit to the Organization appropriate information regarding the 
formulation, provisions and operation of such agreements. 

8. Publicity. Full publicity should be given to any commodity 
agreement proposed or concluded, to the statements of considera- 
tions and objectives advanced by the proposing members, to the 
operation of the agreements, and to the nature and development of 
measures adopted to correct the underlying situation which gave 
rise to the agreement. 

9. Exceptions. The provisions of Chapter V are not designed to 
cover international agreements relating to the protection of human, 
animal or plant life or health; the conservation of reserves of ex- 
haustible natural resources; the control of international monopoly 
situations; or the equitable distribution of commodities in short 
supply. However, such agreements should not be used to accom- 
plish results inconsistent with the objectives of Chapter IV or 
Chapter V. If any such agreement involves the restriction of pro- 
duction or of international trade, it should not be adopted unless 
authorized or provided for by a multilateral convention subscribed 
to by a substantial number of nations, or unless operated under the 

• 269 • 




The Committee for Economic Development was organized 
in August, 1 942, by a group of business leaders who were con- 
vinced that attainment and maintenance of high employment 
after the war could not and need not be left to chance. They 
foresaw an opportunity to achieve unprecedented peacetime 
prosperity if business were ready to swing rapidly to peacetime 
production at the war's end and the government were pre- 
pared with policies and measures that would assist the re- 
conversion and contribute to subsequent high production. 

Recognizing that this undertaking comprised two distinct 
though related sets of problems, the CED provided for two 
areas of action: (1) a Field Development Division to supply 
to businesses, large and small, in every part of the land, in- 
formation and aid in planning peacetime production and em- 
ployment; (2) a Research Division to study the economic 
problems of the immediate postwar transition years, as well as 
the basic long-range problems in maintaining high production 
and employment. 

It was generally agreed in informed quarters that high-level 
employment at the close of the war would require civilian jobs 
for 7 to 10 million more workers than had been employed in 
1 940. This meant that business had to plan a postwar volume 
of business greater than any prior peacetime year — in fact, an 
Over-all increase some 30 to 45 per cent above 1940. 

Through the Field Development Division, nearly 3,000 
county and community committees were established. More 
than 65,000 business men served as members of these com- 
mittees, responsible for getting information concerning post- 
war markets and job requirements to the local manufacturer, 
merchant, and other businesses, and responsible, likewise, for 

• 270 . 

The Committee Jor Economic Development 

prodding the individual business man, hard driven though he 
was with war work, to lay plans for peacetime. 

Tested procedures for making both production and employ- 
ment plans were made available by the national CED office. 
Specialists in industrial management, in product design, in 
advertising and selling, and in training of sales personnel 
placed their skills at the service of all cooperating business men, 
without cost, through handbooks, films, training courses, 
business clinics, and forums for the local committees. An 
outstanding achievement of the Field Development Division 
was a postwar market analysis, carried out with the coopera- 
tion of leading industrial firms and trade associations, covering 
more than 500 finished-goods products. The findings of this 
two-year study were given business and the public in a report, 
American Industry Looks Ahead, issued in August, 1945. 

How thoroughly and carefully the local work was done was 
evident when, at V-J Day, the CED was the only major or- 
ganization to state that, contrary to prevailing opinion, there 
would not be a job slump immediately following the war. 
Its reports from business throughout the country indicated 
preparedness to move rapidly into peacetime production. 
Its wartime "plan jobs" assignment concluded, the Field De- 
velopment Division was discontinued early in 1946. 

Plans for high-level production and employment will not 
flourish long unless national policies prevail that make such 
plans feasible. To define what these national policies of 
government, business, and labor should be to encourage higher 
production and more jobs is the special task of the CED Re- 
search Division. This is the purpose of the research studies of 
which this volume is the thirteenth. 

To the long-range economic questions involved in this 
undertaking were added the particular economic problems 
arising out of the war. The studies completed to date deal in 
great part with the economic problems of the transition from a 
war to a peace economy. The reports, as a group, seek to pro- 
vide information and pragmatic recommendations concerning 

• 271 . 

Controlling World Trade 

problems intimately related to the future of our society, and, 
by the same token, to the life of each of us. 

The authors of these reports have already won distinction in 
their own fields. Perhaps more important is the fact that they 
have demonstrated not only the competence but also the vigor 
of thought which these complex problems demand. Knowing, 
however, that the problems that would be scrutinized — 
demobilization of the war economy, taxation, monetary policy, 
international trade, agriculture, and the like — are not 
separate ones, but are integrated and must be studied in re- 
lationship one to the other, the CED has sought to make 
possible an exchange of information and views by the experts 
and, equally important, between the scholars and business 

What may be a unique scheme of conferences* was estab- 
lished, the objective being to blend the practical experience 
and judgment of the business world with the scholars' knowl- 
edge of the action of economic forces. A Research and Policy 
Committee consisting of representative successful business men 
was set up; to this group was added a Research Advisory 
Board whose members are recognized as among our leading 
social scientists; and finally, the persons who would be re- 
sponsible for the individual reports were named, to comprise 
the Research Stafi". 

The subject matter of each report is threshed out by the 
members of these three groups, meeting together. The author 
of the report therefore has the benefit of criticism and sugges- 
tion by many other competent minds. He is able to follow 
closely the development of the reports on other economic 
matters that aff*ect his own study. 

No efi^ort is made to arrive at absolute agreement. There is 
no single answer to the problems that are being studied. 
What is gained is agreement as to the determinative factors 
in each problem, and the possible results to be achieved by 
differing methods of handling the problem. The author of the 
report has full responsibility, and complete freedom, for pro- 

• 272 • 

The Committee J or Economic Development 

posing whatever action or solution seems advisable to him. 
There is only one rule — the approach must be from the stand- 
point of the general welfare and not from that of any special 
economic or political group; the objective must be high pro- 
duction and high employment in a democratic society. 

The author is free to present his own conclusions and does 
not speak for the Research and Policy Committee or for the 
Research Advisory Board. In turn, the Research and Policy 
Committee usually prepares its own statement of national 
policy. This may endorse all of the recommendations arrived 
at by the author, or it may disagree with some of them. 

Implicit in the organization and support of the CED by 
business is the, belief that leaders in each major group in our 
society will in future need to make every effort to appraise the 
policies and activities of that group as they relate to over-all 
national objectives and well-being. In the CED research 
program, a mechanism has been devised to permit responsible 
study by business men of business problems and to allow re- 
sponsible proposals to be offered for national policies affecting 
business and the economy. Following three years of work 
whose merit has been applauded by government officials, 
labor leaders, economists and other social scientists, it does not 
seem too much to say that in the CED structure business has 
devised a useful tool for democracy. 

The research studies already published or under way divide 
roughly into two parts: 

A. The transition from war to peace: the problems involved 
in the early attainment of high levels of employment and 

B. The longer-term fundamental problems involved in the main- 
tenance of high levels of productive employment after the 
transition period has passed. 

The subjects covered by the individual monographs are: 
A. The Transition from War to Peace: 

1. The Liquidation of War Production^ by A. D. H. Kaplan, 

• 273 • 

Controlling World Trade 

The Brookings Institution (already published). The 
problems involved in the cancellation of war contracts 
and the disposal of government-owned surplus supplies, 
plants, and capital equipment are weighed quantita- 
tively as well as qualitatively. How much war plant 
has the government financed, and what part of it could 
be put into civilian production? What criteria should 
prevail in selecting the producers to be released first 
from vv^ar manufactures, as the war production pro- 
gram is curtailed? How and when should surplus 
goods be sold? Rapid resumption of peace-time pro- 
duction, with conditions favorable to high levels of 
employment, is the gauge by which thejrecommenda- 
tions are measured. 

2. Demobilization oj Wartime Economic Controls, by John 
Maurice Clark, Professor of Economics, Columbia 
University (already published) . When and how should 
the wartime controls be removed? The interdepend en- 
cy of the wartime controls of production, man power, 
prices, wages, rationing, credit policies, and others 
is made clear. How relaxation of each control may 
affect the peactime economy — in terms of demand 
and supply, and therefore in terms of jobs and produc- 
tion levels — is weighed. The conditions that can 
be expected to prevail at diflfer ent stages of the transition 
from a wartime to a peacetime economy are outlined, 
with emphasis on the variables with which we must 
be prepared to deal. Professor Clark does not overlook 
the significance of attitudes and objectives. 

3. Manpower Demobilization and Reemployment, by Robert 
R. Nathan, Consulting Economist, and Emmett H. 
Welch, Chief, Economic Statistics Unit, Bureau of the 
Census. The relationship of demobilization policy to 
reemployment. Recommendations are made for a 
program that would avoid long-period joblessness 
among returning servicemen as well as war workers. 

• 274 • 

The Committee J or Economic Development 

4. Providing for Unemployed Workers in the Transition, by 
Richard A. Lester, Associate Professor of Economics, 
Princeton University (already published) . An estimate 
of the size and the duration of transition unemploy- 
ment. The efficacy of public works employment, 
relief employment, the adequacy of unemployment 
compensation, wartime savings, dismissal pay, and 
the like are appraised. A program is developed to 
provide for the maintenance of workers who v/ill be 
out of jobs in the transition from war to peace. 

5. Financing Business during the Transition, by Charles G. 
Abbott, Associate Professor of Business Economics, 
Harvard University (already published) . The sources 
upon which business has relied for its capital are 
examined, along with the current financial condition 
of large and small corporations. These two are 
weighed against the likely needs of financing by indus- 
try for reconversion and expansion in the transition 
years following the war. 

6. Jobs and Markets, by Melvin G. de Ghazeau, Albert G. 
Hart, Gardiner G. Means, Howard B. Myers, Herbert 
Stein, and Theodore O. Yntema (already published). 
The problem of controlling aggregate demand in the 
several transition years during which the nation will 
endeavor to move from the high plateau of v/artime 
production and employment to a similarly high level 
of peacetime productivity. The deflationary elements 
as well as the current dangerous inflationary forces are 
examined. A program of fiscal, monetary, and price 
control policies is presented to speed civilian production 
and to prevent inflation and depression in the return 
to free markets. 

7. Monetary and Banking Policies in the Postwar Transition 
Period, by John K. Langum, Vice-president, Federal 
Reserve Bank of Ghicago. What monetary and bank- 
ing policies can do to encourage production and 

• 275 • 

Controlling World Trade 

- employment. Federal fiscal policy is analyzed in its 
relationship to the financial requirements of business 
in reconversion and expansion. The significance of 
monetary policies prior to the war and the money and 
banking conditions that will stem from war financing 
are reviewed. The relationship of business spending to 
other money flows and the resultant production pattern 
is discussed. 

B. The Longer-term Fundamental Problems: 

1 . Production, Jobs and Taxes, by Harold M. Groves, Profes- 
sor of Economics, University of Wisconsin (already 
published) . A study of the federal tax structure as it 
affects the creation of jobs. A second volume. Post- 
war Taxation and Economic Progress (already published) , 
concludes Professor Groves' analysis of the relationship 
of taxation to economic development, and presents an 
approach to taxation that would make for construc- 
tive tax policy. The second report inquires into the 
problems of state and local as well as federal taxation. 

2. Agriculture in an Unstable Economy, by Theodore W. 
Schultz, Professor of Agricultural Economics, The 
University of Chicago (already published) . An inves- 
tigation going to the roots of the "farm problem." 
The significance of excess labor resources on farms, 
the failure of price mechanisms to induce shifts of re- 
sources out of agriculture, the differences between the 
farm and industrial sectors in responding to reduced 
demand. The importance to farmers of continued 
prosperity in business. A solution to the farm prob- 
lem without resort to price floors or restrictions on 

3 . International Trade and Domestic Employment, by Calvin B. 
Hoover, Dean of the Graduate School of Arts and 
Sciences, Duke University (already published). An 
examination of the kind of foreign trade policies and 

• 276 • 

The Committee J or Economic Development 

mechanisms we can adopt that will increase our gains 
from international trade and also contribute to world 
peace. A statement of the requirements in terrns of 
the economies of other countries as well as our own. 

4. Controlling World Trade — Cartels and Commodity Agree- 
ments, by Edward S. Mason, Professor of Economics, 
Harvard University (the present volume). The condi- 
tions that brought forth cartels and intergovernmental 
commodity agreements and the way in which both 
types of international business organization operate 
are presented as background to a searching appraisal 
of their role in the political-economic machinery of 
future world trade. American attitudes as well as 
American objectives in foreign trade are reviewed. 

5. Minimizing Business Fluctuations and Unemployment, a 
major series of studies now under way dealing with the 
factors in an advanced industrial economy that affect 
the volume and pattern of demand, supply and em- 
ployment. This series is by John Maurice Clark, 
Melvin de Chazeau, Albert G. Hart, Gardiner C. 
Means, Howard B. Myers, Herbert Stein, Theodore 
O. Yntema, and others to be appointed. 

6. The Special Problems of Small Business, by A. D. H. 
Kaplan, The Brookings Institution, assisted by J. K. 
Wexman. An inquiry into the competitive position 
and the needs of small business. 

7. Providing Adequate Incentives for Enterprise y by C. E. 
Griffin, Professor of Business ^Economics, University 
of Michigan. 

8. The ''Billion Dollar Questions^' By Theodore O. 
Yntema, Gardiner C. Means, and Howard B. Myers. 
An economic primer posing the basic economic prob- 
lems to be faced in a free enterprise system. 

G. Supplementary Papers: 

1. The Economics of a Free Society, by the Hon. William 

• 277 • 

Controlling World Trade 

Benton, Assistant Secretary of State. (Published in 
October, 1944, issue oi Fortune Magazine.) 

2. Personnel Problems of the Postwar Transition Period, by 
Charles A. Myers, Assistant Professor of Industrial 
Relations, Massachusetts Institute of Technology (al- 
ready published). An examination of the problems 
that will confront employers in connection with the 
rehiring of servicemen and war workers, and issues 
that will arise in the shift of the work force from war- 
time to peacetime production. 

3. Federal Tax Reform, by Henry G. Simons, Associate 
Professor of Economics, The University of Chicago. 
The development of a basic philosophy of taxation to 
simplify the federal tax structure and distribute the tax 
burden among individuals in relation to their incomes. 

4. Incidence of Taxation^ by William Vickery, formerly 
Tax Research Division, Treasury Department. 

5. World Politics Faces Economics, by Harold Lasswell, 
Professor of Law, Yale University (already pub- 
lished). A discussion of the interrelationship of eco- 
nomic and political factors shaping the world political 
structure, with particular reference to the future re- 
lations of the United States and Russia. 

6. Changes in Substantive Law, Legal Processes and Govern- 
ment Organization to Maintain Conditions Favorable to 
Competition^ by Corwin Edwards, Professor of Eco- 
nomics, Northwestern University. 

These are the subjects so far authorized by the Research and 
Policy Committee. Others may be undertaken at a later 




Section 3. Research and Policy Committee 

It shall be the responsibility of the Research and Policy 
Committee to initiate studies into the principles of business 

• 278 • 

The Committee for Economic Development 

policy and of public policy which will foster the full contribu- 
tion by industry and commerce in the post-war period to the 
attainment of high and secure standards of living for people in 
all walks of life through maximum employment and high pro- 
ductivity in the domestic economy. All research is to be thor- 
oughly objective in character, and the approach in each in- 
stance is to be from the standpoint of the general welfare and 
not from that of any special political or economic group. 


The determination of whether or not a study shall be pub- 
lished shall rest solely with the Research Director and the Re- 
search Advisory Board. ... A copy of any manuscript 
reported for publication shall be submitted to each member 
of the Research Advisory Board, of the Research and Policy 
Committeej of the Board of Trustees, aAd to the Chairman and 
Vice-chairman of the Information Committee. For each 
subject to be so submitted the Research Director, after con- 
sulting with the Chairman of the Research Advisory Board, 
shall appoint a Reading Committee of three members of the 
Board. Thereupon, as a special assignment each member of 
the Reading Committee shall read the manuscript and within 
fifteen days from its assignment to him shall signify his 
approval or disapproval for publication. If two out of the 
three Reading Committee members signify their approval, 
the manuscript shall be published at the expense of the Corpo- 
ration. ... In no case shall publication necessarily constitute 
endorsement by the Committee for Economic Development, 
the Board of Trustees, the Research and Policy Committee, or 
the Research Advisory Board of the manuscript's conclusions. 
Upon approval for publication, the Research Director shall 
notify all members of the Research Advisory Board and no 
manuscript may be published until fifteen days following such 
notification. The interval is allowed for the receipt of any 
memorandum of comment, reservation, or dissent that any 
member of the Research Advisory Board may wish to express. 

• 279 • 

Controlling World Trade 

Should a member of the Research Advisory Board so request, 
his memorandum of comment, reservation, or dissent, which 
must be signed, shall be published with the manuscript. Any 
signed comment, reservation, or dissent which the Research 
Director may wish to express or have expressed by others shall 
at his request be published with the manuscript. ... In the 
event the manuscript is not approved for publication at the 
Corporation's expense as above provided, the individual or 
group making the research shall nevertheless have the right 
to publish the manuscript. 

Supplementary Papers 

The Research Director may recommend to the Editorial 
Board for publication as a Supplementary Paper any manu- 
script (other than a regular research report) . . . which in 
his opinion should be made publicly available because it 
constitutes an important contribution to the understanding of 
a problem on which research has been initiated by the Re- 
search and Policy Committee. 

An Editorial Board for Supplementary Papers shall be es- 
tablished consisting of five members: The Research Director, 
two members from the Research and Policy Committee, and 
two members from the Research Advisory Board. The mem- 
bers from the Research and Policy Committee and the mem- 
bers from the Research Advisory Board shall be appointed by 
the respective chairmen of those bodies. The Research Di- 
rector shall be the chairman of the Editorial Board and shall 
act as Editor of the Supplementary Papers. ... If a majority 
of the members of the Editorial Board vote for publication, 
the manuscript shall be published as one of a series of Supple- 
mentary Papers, separate and distinct from the regular re- 
search reports. . . . Publication does not constitute endorse- 
ment of the author's statements by the Committee for Eco- 
nomic Development, by the Board of Trustees, by the Re- 
search and Policy Committee, or by the Research Advisory 

• 280 • 


Ralph E. Flanders, Chairman 
Consultant to the Board 
Federal Reserve Bank 
Boston, Massachusetts 


Jones & Lamson Machine Company 
Springfield, Vermont 

Chester C. Davis, Vice Chairman 
President, Federal Reserve Bank 
St. Louis, Missouri 

James F. Brownlee 
290 Hass Road 
Fairfield, Connecticut 

Gardner Cowles 

President and Publisher 

Des Moines Register & Tribune 

Des Moines, Iowa 

Donald David, Dean 

Graduate School of Business 

Harvard University 
Boston, Massachusetts 

Marion B. Folsom, Treasurer 
Eastman Kodak Company 
Rochester, New York 

William C. Foster, Vice President 
Pressed & Welded Steel 

Products Company 
Long Island City, New York 

George L. Harrison, President 
New York Life Insurance Company 
New York, New York 

Paul G. Hoffman, President 
The Studebaker Corporation 
South Bend, Indiana 

Eric A. Johnston, President 
Motion Picture Association 

of America, Inc., 
Washington, D. C. 

Ernest Kanzler 

Chairman of the Board 
Universal C.I.T. Credit 

Detroit, Michigan 

Thomas B. McCabe, President 
Scott Paper Company 
Chester, Pennsylvania 

Philip D. Reed 

Chairman of the Board 
General Electric Company 
New York, New York 

Raymond Rubicam 
444 Madison Avenue 
New York, New York 

Beardsley Ruml 

Chairman of the Board 
R. H. Macy & Co. 
New York, New York 



Sumner H. Slighter, Chairman 
, Lamont University Professor 
Harvard University 

Robert D. Calkins 
Vice Chairman 
Dean, School of Business 
Columbia University 

Douglass V. Brown 

Professor of Industrial Relations 
Massachusetts Institute of 

David F. Cavers 

Professor of Law (on leave) 
Harvard University 

Neil Jacoby 
Vice President 
The University of Chicago 

Harold Lasswell 
Professor of Law 
Yale University 

Theodore W. Sghultz 

Professor of Agricultural Economics 
The University of Chicago 

Ralph Young 
Assistant Director 
Division of Research Statistics 
Board of Governors of the 
Federal Reserve System 

Research Director 

Theodore O. Yntema 

Professor on leave from School of Business 

The University of Chicago 

Associate Research Director 


Executive Secretary of Research Committee 

Howard B. Myers 

Associate Research Director 
Gardiner C. Means 

Assistant to Research Director 
Sylvia Stone 




Agricultural Adjustment Act, 199 

Agricultural Experiment Stations, 53- 

Agricultural Extension Service, 54 

Agricultural policy, 28, 136, 241, 242, 
247, 251, 258, 265 

Agricultural products, 136 

export subsidies, 136, 241, 242 
foodstuffs, 175 

industrial raw materials, 183, 218 
intergovernmental agreements, 141 
surpluses, 36, 136, 137, 150-151, 254 

Agriculture, 141 

Ahearn, Daniel, 26n. 

Alien Property Custodians, 11, 89, 115 

Alkali Associations, 68, 70, 78, 79 

Allied Chemicals, 211 

Aluminum, 16, 34, 108, 109, 193-194, 
241, 242 

Aluminum cartel, 14, 79 

Aluminum Company of America, 79, 
105-108, 194 

Aluminum Limited of Canada, 79 

American Magnesium Corporation, 

Ammonia, 210, 211 

Anglo-American Oil Agreement, 84n. 

Anticartel policy, 28, 58, 142 
Great Britain, 40-41 

Antitrust laws, 5-7 

Arnold, Thurman, 98, 109-110 

Asbestos, 16 

Ashurst, Senator, 198, 258 

Askania Werke, 119 

Atabrine, 58 

Atomic Energy, Commission for the 
Control of, 5 In. 

Baillieu, Sir Clive, 41 n. 

Bausch & Lomb Optical Company, 

118, 119 
Bauxite, 245 

Beef agreement, 224, 233, 260 
Bendix Aviation Corporation, 119 
Berge, Wendell, 27, 30, 49n., 70n., 

73n., 98, 118n., 123 
Beryllium, 58 

Beveridge, Sir William, 39n. 
Biddle, Attorney General, 113, 117, 

120, 122, 123, 124n. 
Black, J. D., 234n. 
Borkin, Joseph, 101, 102, 105n. 
Bosch, Robert, Company, 119 
Bosch Corporation, 119 
Brandt, Karl, 163n., ISOn. 
Bretton Woods Agreement, 66n., 127 
Brussels Sugar Convention, 139, 179, 

238, 260 
Buffer stocks, 145-147, 165-167, 169, 

212-223, 243, 252 

Cables, 17 

Capacity, excess, 11, 33-34, 135, 139, 

agricultural products, 36, 136, 

manufacturing, 33 

nitrogen, 35-36 

synthetic, 138, 159, 209 
Carboloy Corporation, 102-105 
Cartels, international, aluminum, 14 

American participation in, 75-80 


Controlling World Trade 

Cartels, international, American pre- Clayton, W. L., 187n. 

paredness for war and, 97 

American security and, 96-132 

amount of world trade subject to, 

anticartel policy, 28, 40-41, 58, 

calculations, 29 

conditions, 29 

curbing, 4, 44 

definition, 29-31 

excess capacity and, 11, 33-34 

German, 9-10, 96, 128 

government auspices of, 20 

importance of problem, 26 

limitation by international ma- 
chinery, 59 

as medium of aggression, 124 

mercury, 14 

military aggression and, 8-9, 122 

monopoly effects of, 20-21 

patent, 30, 98-99 

Phoebus, 19 


importance of, 28 

by international agreement, 

recommendations, 3 

potash, 14 

price, 29 

quota, 29 

regulation, 4, 6, 39-44 

restrictive practices, 46 

rubber, 23 

Russia and, 14, 15n. 

subsidiaries and, 13, 14, 75-77 

as trade barriers, 18 
Cement, 17 

Chadbourne plan, 153, 213 
Chemical cartel, 51-52 
Chemnyco Company, 117 
Chilean Nitrates and Iodine Sales 

Corporation, 35, 57-58, 209 
China Trade Act, 57n. 
Clark, Colin, 175^. 
Clark, Senator, 114 

Climax Molybdenum, 56 

Coal industry, 80 

Cocoa, 16, 182, 245 

Coffee, 16, 149, 153, 181, 212w., 217, 

224, 226, 228, 234, 237, 245 
Combines, 55 
definition, 20-21 
international, 55-59 
monopoly aspects of, 21, 56, 57 
regulation of, 45 
Commission for the Control of Atomic 

Energy, 5 In. 
Commodities, American policy on, 
138, 241 
control of, 16 

intergovernmental, 16, 17, 25, 

32-33, 36-38 
international economic organiza- 
tion and, 262 
private, 16, 17 
international consultation on, 138, 
147-148, 203 
Commodity agreements, 16, 17, 25, 28 
aims of, 149, 153, 199, 200 
American agricultural policy and, 

American interests in, 243 
antecedents of, 152, 169 
conditions favorable to, 150 
conservation by, 140, 160 
health and, 154 
intergovernmental, 135 

U. S. State Department pro- 
posals, 266 
morals and, 154 
price stabilization and, 163 
proper scope and character of, 252 
quota schemes, 143-145, 146 
Russia and, \5n. 
security and, 154 
Commodity Credit Corporation, 165, 

187/z., 204, 215, 248, 249 
Competition, 13 
cartels and, 29 



Competition, domestic, limitation by England, limitation of competition, 12 

international business agreements, 
England's limitation of, 12 
limitation of, 112 
in third-country markets, 78-79 
Condliffe, J. B., 159 
Conservation, 140, 156, 160 
Consumption, expansion of, 139, 238, 

254, 263 
Copper, 16, 17, 141, 142, 189-190, 

214-215, 241, 242, 245 
Corn, 249 

Costs, production, monopoly and, 22 
Cotton, 152, 153, 183-186, 203-204, 
212n., 215, 226-228, 231, 241- 
242, 245-246, 248-251, 257-259, 
International Advisory Committee, 

Davis, Joseph S., 225«., 232 
Diamond Match Company, 23 
Distribution channels, cartel monop- 
olization of, 19 
Dow Chemical Company, 105-109, 


Draft Wheat Agreement, 135, 213, 

224«., 225-226, 227n., 230, 236, 


Drugs, international trade in, 33, 154 

du Pont de Nemours & Company, 51, 

53, 58, 211 
Duperial companies, 78 
Diisseldorf conference, 125-126 
Dyes, 17 

Edwards, Corwin, 124w., 278 
Emergency Economic Council for 

Europe, 33 
Employment, high level of, 3, 39, 265, 


tariff policy, 12 
Espionage, 8, 97, 98, 100, 116, 120 
European Coal Organization, 33 
Export associations, 6, 30, 46-47, 88 

American, 68-74 
ExfKjrt territory, division of, 112 

Farben, I. G., 52, 58, 78, 90, 91, 106- 
108,111,112, 114, 115,117, 121, 
Fats and oils, 180 
Federal Farm Board, 1 65 
Federal Power Commission, 117 
Federal Surplus Commodities Corpo- 
ration, 180 
Federal Trade Conmiission, 68, 69, 
78, 86 
investigation of export associations, 
Federation of British Industries, 125 
Fishing, 140, 141, 162-163, 200 
Flour, 249 
Food and Agriculture Organization, 

127, 202, 212, 262 
Foodstuffs, 218 

postwar outlook for, 175 
Foreign trade, amount subject to 
cartel control, 26-27 
application of antitrust acts, 86 
national income and, 244 
in raw materials, 244 
U. S. State Department proposals, 

Gallagher, Ralph W., 76n. 

General Electric Company, 103-104 

Germany, Allied Military Control, 
9-10, 131-132 
domestic cartels in, 128 
"Master Plan," 100, 104, 120-122 
technological developments, 9 

Glass, plate, 17 


Controlling World Trade 


Haley, B. H., 253 
Hansen, Alvin, 167 
Haussmann, Frederick, 26n., 76n. 
Health, 154 
Hudson, R.'S., 125 
Hutchinson, Walter R., 114n. 

International Tin Committee, 191, 

192, 213, 217, 235n. 
International Trade Organization, 

62-64, 127, 202, 227, 238, 254, 

256, 259, 263 
International Wheat Agreement of 

1933, 177, 225 


Imperial Chemical Industries, 35, 51, 

53, 58,78, 211 
Income, farm, 250 

national, 244 
International business agreements, 
advance clearance of, 85-88 
American policy toward, 66-95 
change in character of, 1 1 
government participation in, 14 
increase in number of, 11-14 
limitation of domestic competition 

by, 80 
policy, American, 66-95 

recommendations, 3 
reasonableness of, 82 
registration of, 81 
International Business Practices Of- 
fice, 5, 60w., 61 
functions of, 61 
International Chamber of Commerce, 

41 «. 
International Commercial Policy Or- 
ganization, 5, 145 
International Cotton Advisory Com- 
mittee, 204 
International Labour Office, 127, 264 
International Nickel Company, 21, 

56, 57 
International Petroleum Commission, 

207, 208 
International Rubber Advisory Com- 
mittee, 160, 206 
International Rubber Regulation Com- 
mittee, 234 
International Tea Committee, 1 82 

Justice Department, U. S., 85, 85n., 
87, 97, 104, 113, 119, 120, 123 

Kapok, 16 

Keynes, J. M., 166n. 

Kilgore Committee, 110, 117, 120 

Knorr, K. E., 158«., 187n., 213n., 

228n., 229n. 
Krupp, 103-105, 132 

La FoUette, Senator, 109 
Lead, 194-195, 245 
Lewis, Ben W., \2n. 
Lighting, fluorescent, 23 
Linoleum, 17 
Lucas, Senator, WAn. 
Lumber, 16 


McGowan, Lord, 19n., 41 n. 

Machine-tool industry, 34 

Magnesium, 34, 105-109, 193-194, 
241, 242 

Magnesium Development Corpora- 
tion, 10( 

Matches, 23 

Meinhardt, 1 

Mercury cartel, 14 

Merica, P. D., 155n. 

Mining, 140 

Molybdenum, 56 



Monopolies, effect on labor utiliza- 
tion, 22 
cartels and combines, 20 
international aspects of, 24 
production costs and, 22 
revenue from sales and, 23-24 
technology and, 22-23 

Morals, 154 

Morrison, Herbert, 41 n. 

Morton Salt Company, 93 

Motion picture industry, 113 


Narcotics, 33, 154 

National Foreign Trade Council, 81, 
82, 85, 88 

National Lead Company, 52 

National Patent Planning Commis- 
sion, 110, 111 

National Resources Planning Board, 

Nitrates, 16, 34, 138, 192-193, 209- 
212, 241, 242, 261 

Nitrogen cartel, 35-36, 192, 209-212 

Petroleum industry, 16, 76, 80, 84n., 
87, 88, 138, 154, 156, 157, 206- 
208, 241, 242, 245 

International Commission on, 207, 
Petroleum Industry War Council, 

Phelps, D. M., 76«. 
Phoebus cartel, 19 
Phosphate Associations, 68, 77 
Phosphates, 16 
Photophone, 113 
Plate glass, 17 
Platinum, 56 
Plexiglass, 114 
Potash cartel, 14, 16 
Prices, 143 

cartels and, 4, 25 

farm, 250, 251 

raw material, 145, 218, 252 

stabilization, 38, 140, 163, 213, 215, 
216, 222, 252 
Production, 143 

restriction of, 139 
Public utilities, 33 


Oil {see Petroleum industry) 

Opium, 154 

Osram Company, 121 

Paper, 17 

Patents, exchange of, 99, 101 

effect on American war produc- 
tion, 101 
licensing, 99-101 
pooling of, 100, 103, 106-108 
Patents and processes agreements, 7, 8, 
30, 49-55, 88-93 
espionage and, 8 
registration of, 89 
Peanuts, 249 
Perkins, Milo, 81 n., 85n. 

Quebracho, 16 
Quinine, 16 

Quota schemes, 143-146, 169, 170, 
216, 220-221, 224-240, 243 

arguments against, 231 

desirability, 231-240 

workability, 225-231 

Radio Corporation of America, 113 
Raw materials, 135, 137, 140, 144, 156 

American interests in, 241 

foodstuffs, 175 

industrial, produced by agriculture, 
183, 218 

mineral, 188 

postwar outlook for, 173 


Controlling World Trade 

Raw materials, prices, 145, 218, 252 
surplus, 150-151, 202 
U. S. foreign trade in, 244 
Reichsgruppe Industrie, 125 
Research, govemmentally directed, 
50, 53-55, 89 
in Russia, 54 
Reynolds Metals Company, Inc., 194 
Rice, 179, 249 
Robbins, W. G., 103m. 
Rohm and Haas, 114 
Rowe, J. W. F., 150,232 
Rubber, 16, 75-76, 121, 135, 158- 
160, 183, 187, 226, 228, 230, 234- 
235, 245, 246, 255, 261 
Advisory Panel, 206 
cartel in, 23 
International Advisory Committee, 

106, 206 
International Regulation Commit- 
tee, 234 
synthetic, 138-139, 158, 160, 187, 
Russia, cartels, 14, 15n. 

commodity agreements, 15«. 
industrial research, 54 

Sabotage, 8 

Sales, monopolies and, 23-24 

Salt, 93 

Schultz, T. W., 161, 175n., 247, 248 

Scientific Research and Development, 

Office of, 54 
Security, cartels and, 96, 132 

commodity agreements and, 154 
Sherman Antitrust Act, 30, 70, 71, 78, 

80, 83, 85 
Siemens Apparate und Maschinen, 

119, 121 
Small business, 69 
Smith, Adam, 72 
Solvay Company, 35, 78, 211 
Sperry Gyroscope Corporation, 119 
Stahlwerksverband, 124 

Staley, Eugene, 233n. 

Standard Oil of New Jersey, 52, 111, 

112, 115, 131 
Stanley, President, 126 
State Department, U. S., 81, 81n., 85, 
proposals, 61-65, 127, 253-270 
international commodity agree- 
ments, 266-270 
restrictive business practices, 64- 
Steagall Amendment, 249 
Steel, European cartel, 11 

products, 17 
Sterling Products Corporation, 11-12 
Stickstoff Syndikat, 35 
Stocks, 143 

buffer, 145-147, 165-167, 169, 

212-223, 243, 252 
surplus, 169, 195, 214-216 
Storage, 146, 164, 165, 214, 216, 223, 

Strategic materials, 154-155, 157 

stockpiling of, 1 56, 1 66 
Subsidiaries, foreign, 13, 14, 75-77, 79 
Subsidies, export, 136, 241, 242, 250 
Subversion, 8 

Sugar, 16, 153, 178, 213, 224, 226, 228, 
236, 245, 246, 261 
Brussels Convention, 139, 179, 238, 
Sulphur, 16 

Sulphur Export Association, 77 
"Surplus," 195-198 
Surplus Property Act of 1944, 204, 249 

Tariff Commission, U. S., 193 
Tariffs, 13, 239 

England's policy on, 12 

injury inflicted by, 28, 80 
Tea, 16, 182, 226, 230, 235-236, 245, 
246, 259, 261 

International Committee on, 182 

. 288 


Technology, 157«. 

backwardness of British industries 

in, 23n., 54 
German developments in, 9 
interchange of, 5, 8, 13, 14, 46, 49- 
50, 53-55, 88-91, 98, 101, 110, 
limitations of use of acquired, 110 
monopolies and, 22-23 
Tin, 16, 141, 142, 159, 191-192, 199, 
212-214, 217, 226, 227-229, 232, 
235, 236, 238, 245, 246, 260, 261 
International Committee on, 191, 
192, 213, 217, 235«. 
Tin plate, 17 
Titanium, 52 
Tobacco, 249 
Tomasevich, Jozo, 1 62n. 
Trade barriers, 13 
cartels as, 18, 21 
combines as, 21 

reduction of, 139, 145, 147, 148, 
174, 202, 203, 238, 239, 250, 
Truman Committee, 110, 111, 115 
Tsou, Stanley S., 234n. 
Tungsten carbide, 102-105 

Viner, Jacob, 128 


Walker, John W., 23n. 

Watkins, M. W., 161, 164n., 237n. 

Webb-Pomerene Act, 14, 68, 69, 70- 

74, 78, 85, 86, 124 
Welch, Charles, 101, 102, 105n. 
Wheat, 16, 177, 228, 230-231, 241, 
242, 245-247, 249 
Draft Wheat Agreement, 135, 213, 
224n., 225-226, 227n., 230, 
236, 250 
export subsidies, 249 
international agreement on, 177, 
Wickard, Claude R., 210 
Wickizer, V. D., 179r?., 226n. 
Wool, 147, 183, 186-187, 214, 255, 

259, 261 
Woolton, Lord, 41 n. 
Worker-owner industries, 17, 141 
World Trade Alliance, 40n. 


United Nations, 32, 156, 207, 227, 
254n., 262 
Conference on Food and Agri- 
culture, 264 
international trade controls, 32 
United Nations Relief and Rehabili- 
tation Administration, 249 

Yates, P. Lamartine, 170;z., 191; 

Zeiss, 118, 119 
Zinc, 194-195, 245 


Date Due 
Due Returned Due Returned 

dCTd m] 

St- '.. ■■ '"-^.'i 


Controlling world trade sci 

3 i2t2 03107 sam.